SFKS is pleased to announce the promotion of Marco Chong and Koey Wong as Senior Associates as from 1 July 2026.
Both Marco and Koey joined SFKS as trainee solicitors, stayed with us upon qualification as solicitors, and showcased their consistently high standards and quality of legal services.
Marco’s practice includes capital markets, corporate finance, regulatory compliance for listed companies, mergers and acquisitions (M&As), and general corporate and commercial advisory matters. Marco has extensive experience in advising Main Board and GEM issuers listed on the Hong Kong Stock Exchange on a range of corporate and transactional matters. Marco works closely with Hong Kong listed companies and their directors and shareholders and assists them with navigating public takeovers and issues in relation to disclosure obligations and other compliance matters involving the Takeovers Code and the Securities and Futures Ordinance. Marco also advises listed and private companies across different sectors, statutory bodies, charitable institutions and high-net-worth individuals on a broad spectrum of general commercial matters, such as public and private M&As, corporate reorganisations, formation of joint ventures, and general commercial contracts.
Koey’s practice encompasses matrimonial law, land and property, contentious probate, debt recovery, and commercial disputes. Koey handles a wide variety of civil litigations, including cases concerning contracts, bankruptcy and insolvency, defamation, adverse possession, personal injuries, tenancy, fraud and shareholders’ disputes, as well as sensitive divorce and separation cases that often involve child care issues. Koey also has experience in fraud-related matters and advises on urgent injunctions for freezing the recipients’ bank accounts. For asset tracing and recovery, Koey works closely with legal professionals and investigators in jurisdictions such as PRC, the United Kingdom and New Zealand. Recognising alternative dispute resolution (ADR), Koey supports and is well-equipped and willing to explore cost-effective alternatives, such as mediation, with her clients in order to achieve the best outcomes.
We congratulate Marco and Koey for their promotion.
SFKS is pleased to announce a successful outcome for our client before the Court of Appeal in Choi Wan Sheung Nancy v Choi Si Ming Danny and Another [2026] HKCA 997. On 12 June 2026, the Court of Appeal dismissed the Defendant’s appeal and upheld the judgment of the Court of First Instance in favour of our client, the First Plaintiff therein.
The dispute arose from the administration of the estate of the parties’ late mother and concerned, among other matters, the Defendant’s sale of an estate property in Hung Hom (the “HH Property”) and the beneficial ownership of a property in Causeway Bay (the “CWB Property”). The Defendant, who was the executor of the estate, contended that he had acquired our client’s and other beneficiaries’ interests in the estate and that our client held her interest in the CWB Property on trust for him.
At first instance, the Court of First Instance rejected the Defendant’s claims. The Court found that the Defendant had breached his duties as executor by selling the HH Property at an undervalue and ordered him to compensate our client for her one-fifth share of the difference between the sale price and the market value. The Court also declared that the beneficial interests in the CWB Property should be apportioned by reference to the parties’ respective financial contributions, with our client entitled to a 72.2105% beneficial interest.
On appeal, the Court of Appeal accepted our client’s position and dismissed the Defendant’s appeal. The Court held that there was no proper basis to interfere with the trial judge’s findings of fact and credibility, and that the Court of First Instance was entitled to reject the Defendant’s case on the alleged acquisition of our client’s and other beneficiaries’ interests and his claim to sole beneficial ownership of the CWB Property. The Court of Appeal further awarded our client the costs of the appeal.
This result is a welcome affirmation of our client’s rights following a long-running family and estate dispute. It also demonstrates SFKS’s experience in handling contentious probate, trust, property and appellate disputes, including cases involving executor duties, beneficial ownership and complex factual challenges.
This case serves as a timely reminder to litigants aggrieved by a first-instance decision: an appeal is not a retrial, nor does it provide another open avenue to easily disturb a trial judge’s findings of fact. As cited by Mr Justice Anderson Chow, a first instance trial on the merits should be “the main event”, rather than a “tryout on the road”. An appellate court will accord substantial deference to a trial judge’s findings of fact and credibility assessments given their unique “heard and seen” advantage and holistic familiarity with the case, something which an appellate court lacks. Trying to do otherwise would be a waste of judicial resources.
This case was led by our Consultant Mr. Tommy Tam and our Partner Ms. Jenny Wong and assisted by our Associates Ms. Koey Wong and Mr. Tommy Lam. SFKS also take this opportunity to thank Counsel Stony Chan for his thorough and able assistance throughout.
Full judgment can be found at legalref.judiciary.hk/lrs/common/ju/ju_frame.jsp?DIS=181798&currpage=T.
SFKS collaborated with a law firm in US in the recent success in resolving an intellectual property claim concerning a multinational corporate.
The dispute involves the multinational corporate suing, amongst others, a former key person at its Hong Kong office for allegedly infringing copyrights and divulging trade secrets. As the underlying agreement is governed by Delaware law, we assisted our client in instructing Delaware lawyer within our International Lawyers Network (ILN), and provided legal support to the Delaware lawyer in acting in the US proceedings, providing advice and engaging in out-of-court negotiations, as well as close attendance throughout.
SFKS has a long history of strength and experience in contentious and non-contentious intellectual property practice. Back in 1997, SFKS filed Hong Kong’s first registered design, first short-term patent, and first standard patent applications. SFKS advises on initial strategising, branding, drafting, filing, prosecution, opposition and revocation of intellectual property rights. As an all-service law firm, and blending our intellectual property practice and dispute resolution expertise, SFKS is well-positioned to assist in IP disputes as well.
IP disputes are often cross-jurisdictional in nature. SFKS, being a member of the International Lawyers Network (ILN), a global association of 91 high-quality, independent law firms representing more than 5,000 lawyers worldwide, facilitates expedient and frictionless access to top-tier specialist counsel worldwide and ensures comprehensive and seamless legal support to cross-jurisdictional affairs.
Introduction
Over the past twenty years, some Hongkongers have taken up residence abroad, many settling in the United Kingdom, Canada, Australia and other jurisdictions. In more recent years, as some families now consider return migration to Hong Kong, a frequently misunderstood question then arises: what is the right of abode status of children born to those parents overseas?
Many families assume that their children born overseas can automatically "inherit" Hong Kong permanent resident status. That assumption is often misconceived. The real starting point is the child's nationality at birth, which typically determines whether the child can rely on the Chinese descent route to the right of abode, or must instead qualify personally under the non-Chinese route. In many cases, the result is that the parents may return and reside in Hong Kong as permanent residents, while their children cannot rely on the same route and must face years of personal residence before any entitlement. A common and particularly striking example concerns families who emigrated to the United Kingdom under the British Nationality (Hong Kong) Selection Scheme or the later British National (Overseas) (BN(O)) route. Some parents who remained In the United Kingdom and acquired British citizenship or settled status there may assume that, because they retain Hong Kong permanent resident status and continue to be treated as Chinese nationals for the right-of-abode purposes, their overseas born children stand in the same position. They often do not. Understanding why requires close attention to the statutory framework, the Nationality Law of the People's Republic of China (PRC Nationality Law), and the case law on permanence.
The Statutory Framework
Article 24(2) of the Basic Law sets out the categories of Hong Kong permanent resident. Schedule 1 to the Immigration Ordinance (Cap. 115) (the Ordinance) provides the operative framework. For present purposes, two routes matter most:
a. the Chinese route under paragraphs 2(a)-(c) of Schedule ; and
b. the non-Chinese route under paragraph 2(d) of Schedule 1.
These two routes Impose materially different requirements.
The Chinese Route
For children of Hong Kong permanent residents born abroad, the key provision Is paragraph 2(c) of Schedule 1 (the descent route). The practical attraction of this route is dear because It dispenses With the seven years' personal residence requirement. However, It Is only available If the child was a Chinese national at birth and the parent was already a Hong Kong permanent resident when the child was born. The nationality question is often where the case succeeds or falls. Whether a child born abroad is of Chinese nationality often turns on Article 5 of the PRC Nationality Law. A child born abroad to a Chinese national parent generally has Chinese nationality unless the parent had "settled abroad" and the child acquired foreign nationality at birth. The Immigration Department's published guidance gives a clear illustration: where the parent is an "overseas resident" (e.g. a holder of the United States green card or United Kingdom's indefinite leave to remain) and the child acquires foreign nationality at birth, the child does not have Chinese nationality for Article 5 purposes and paragraph 2(c) route of Schedule 1 is usually unavailable, irrespective of the parent's own continued treatment as a Chinese national and Hong Kong permanent resident. Many families only discover this after refusal. The significance of this is that the paragraph 2(c) of Schedule l is concerned with conditions as they stood at birth. Later changes in the parent's status do not retrospectively cure a deficiency at that time.
Families sometimes ask whether the position can be revisited, for example, by renouncing the child's foreign nationality. Such options are highly fact-sensitive and require specialist advice in the PRC.
The Non-Chinese Route
Where the Chinese route is unavailable, the child cannot derive Hong Kong permanent resident status from the parent and must qualify personally under paragraph 2(d) of Schedule 1, which requires seven years of continuous ordinary residence in Hong Kong immediately before the application (aggregate residence is insufficient) and Hong Kong being taken as the place of permanent residence.
The Ordinary Residence Requirement
The "immediately before" rule is strict (Schedule 1, paragraph 1(4)(b)). As Fateh Muhammad v Commissioner of Registration [2001] HKCU 662 makes clear, the qualifying period must run directly up to the application itself; aggregate residence over a longer period is insufficient.
Certain periods are excluded from ordinary residence by section 2(4) of the Ordinance and may interrupt continuity. In this connection, Vallejos v Commissioner of Registration [2013] 16 HKCFAR 45 confirmed the meaning of "ordinary residence" under Article 24(2)(4) must be interpreted in light of context and purpose, and that immigration status of the residence is relevant to that analysis. In the particular case of foreign domestic helpers (FDH), the highly restrictive conditions governing their admission and stay meant that their residence was what the CFA determined as being "qualitatively so far removed from what would traditionally be recognized as "ordinary residence'"" as to fall outside Article 24(2)(4).
Temporary absences, however, do not necessarily break continuity. Section 2(6) of the Ordinance provides that a person does not cease to be ordinarily resident merely because of a temporary absence, having regard to its reason, duration and frequency. Whether, and in what circumstances, section 2(6) can preserve continuity in more complex cases remains a question requiring careful attention on the facts of the individual case.
The seven-year requirement is strict not only in duration alone. In Nowodzelski v Director of Immigration [2018] HKCA 295, the Court of Appeal reiterated that a person who had no lawful right to remain in Hong Kong after expiry of his limit of stay could not rely on that period as constituting ordinary residence for paragraph 2(d) of Schedule 1. That approach is also consistent with the strict operation of the ordinary residence requirement illustrated by Li Mengzhi v Commissioner of Registration [2024] 2 HKC 330 and, on appeal, [2026] HKCA 246. The applicant had in fact lived in Hong Kong for many years, but once her landing was treated as unlawful, section 2(4)(a)(i) prevented that period from counting as ordinary residence, with the result that she could not satisfy the seven-year requirement for permanent resident status.
The Permanence Requirement
Ordinary residence alone is not sufficient. The applicant must also satisfy the permanence requirement identified in Prem Singh, namely that Hong Kong has to be treated as a long-term home, demonstrated by objective facts consistent with that intention (Prem Singh v Director of Immigration [2003] 6 HKCFAR 26).
Schedule 1, paragraph 3 lists relevant indicators to that evaluation such as whether the applicant normally lives in Hong Kong, whether close family members are here, whether the applicant has a reasonable means of support, and whether they have paid tax in Hong Kong. No single factor is decisive, but the family's "centre of life" often carries decisive weight.
But Prem Singh should not be read as imposing a rigid checklist of "concrete steps". As clarified in Gutierrez Joseph James v Commissioner of Registration [2015] 1 HKC, permanence imports both subjective and objective elements and must be assessed in light of all evidence. Conduct, surrounding circumstances, and arrangements made on the applicant's behalf may all be relevant.
Read together, Prem Singh and Gutierrez establish that permanence is neither a purely formal declaration nor an impossible standard requiring the applicant to sever all foreign links. The courts require a fact-sensitive assessment of whether Hong Kong has genuinely been taken as the permanent home.
Why Birth Location Matters
As the analysis above demonstrates, birth location can materially affect the routes available. If a child is born overseas after the parent is treated as "settled abroad", Article 5 of the PRC Nationality Law will usually close the Chinese descent route at birth.
Two practical steps may preserve options. First, the birth may occur before the parent obtains foreign settled status, for example while still on a time-limited BN(O) or skilled-worker visa. Second, the family may consider giving birth in Hong Kong which may preserve eligibility under paragraph 2(a) of Schedule 1 or, for children under 21 born to category (d) parents, paragraph 2(e).
Paragraph 2(e) is notable because it shows that the Ordinance does make a limited, express provision for children born in Hong Kong to a category (d) parent. The absence of any equivalent provision for children born outside Hong Kong is therefore unlikely to be accidental It reflects a deliberate distinction in the statutory scheme.
Challenging a Refusal
The primary remedy is an appeal to the Registration of Persons Tribunal under section 3D of the Registration of Persons Ordinance (Cap. 177). The 90-day deadline is strict. The Tribunal determines the factual entitlement to the right of abode, not the rationality of the Commissioner's decision. Judicial review is a secondary remedy where the refusal is treated as a Director of Immigration decision or where a discrete public law error exists.
For practitioners, the strategic priority is identifying the decisive legal issue early. Depending on the case, that may be the child's nationality at birth, the parent's foreign immigration status at the time, excluded periods under section 2(4), satisfaction of the "immediately before" or the permanence requirement. The more precisely the case is framed, the more focused both the evidence and any challenge route can be.
Practical Guidance
For paragraph 2(d) cases, evidence should be assembled separately for residence and permanence. Residence evidence should establish continuity. Permanence evidence should address whether Hong Kong is the family's genuine centre of life, including financial and tax ties, family accommodation, schooling, healthcare, and sometimes the extent to which overseas connections have been maintained or wound down. A chronology proving physical presence will not, by itself, satisfy the permanence question. Conversely, bare assertions of long-term intention will not overcome a weak factual case on residence.
Where the applicant is a child, the Gutierrez principle requires particular attention. The evidence must address what arrangements the parent or guardian has made on the child's behalf and critically, what would secure the child's continued residence if the parent's own immigration position changed. That evidential gap was central in Gutierrez itself and should be anticipated in every child case.
Timing the application is crucial. The application should be made when the applicant can demonstrate a continuous qualifying period running right up to the filing date. Premature filing before the qualifying period is complete risks the entire claim.
Parents holding category (d) status should also be advised that the same permanence test applies to them on an ongoing basis. Prolonged absence and a settled life abroad can jeopardise their own status under Prem Singh, with knock-on effects for any dependent visas.
Summing up
A striking feature of the current framework is that parents may remain Chinese nationals and Hong Kong permanent residents, yet their overseas-born child may not be able to rely on the Chinese descent route. If the parents may return to Hong Kong as permanent residents, families may reasonably ask why the child must instead qualify independently through a continuous seven-year period of ordinary residence, even where the child is lawfully permitted to remain in Hong Kong. The anomaly may have other practical consequences. For example, when traveling to the Mainland, the family unit may be placed under different documentary regimes. In such a case, the split in status may do more than create administrative inconvenience. For those unfamiliar with this area of law and practice, the distinction may be difficult to reconcile.
At the level of legal analysis, the framework produces outcomes that are largely predictable once the child's nationality at birth and the parent's overseas immigration status at the relevant time are identified. These two facts will often determine whether the Chinese descent route under Schedule 1 paragraph 2(c) is available. Where it is not, paragraph 2(d) generally requires personal qualification through a continuous seven-year period of ordinary residence immediately preceding the application, together with a substantiated permanence case by objective evidence.
Taken together, the case law reflects a strict but consistent judicial approach. Permanence is a constitutional criterion to be assessed objectively in light of all relevant circumstances, while the seven-year ordinary-residence requirement operates strictly as to both duration and quality of stay.
As cross-border mobility becomes an increasingly ordinary feature of family life, the application of the right-of-abode framework to overseas-born children of Hong Kong permanent residents is likely to remain an important and recurring issue in Hong Kong immigration law.
This article is co-authored by our Partner Peter Sit and our Trainee Solicitor Christy Hui.
This article first appeared in the June 2026 issue of the Hong Kong Lawyer, the official journal of The Law Society of Hong Kong.
Background
The signing of the Arrangement on Mutual Service of Judicial Documents in Civil and Commercial Proceedings between the Mainland and the Hong Kong Special Administrative Region on 20 April 2026 marks a transformative milestone in the judicial history of cross-border disputes (“New Arrangement”).
The New Arrangement addresses the limitations in the previous 1999 regime by introducing multimodal service options, including electronic service, and by streamlining court-to-court entrustment through digitalization to accommodate the surge in cross-border cases, thereby aligning judicial mechanisms with the digital realities of modern commerce, and enhancing litigation efficiency.
Historical Foundation: The Old Arrangement in 1999 and the Need for Reform
The origins of mutual service between Hong Kong and the Mainland are rooted in Article 95 of the Basic Law, which empowers the Hong Kong to maintain judicial relations with the legal departments of other parts of the country. Shortly after the handover, the Arrangement for Mutual Service of Judicial Documents in Civil and Commercial Proceedings between the Mainland and Hong Kong Courts was established in 1999 to provide a formal channel for cooperation with court-to-court entrustment as the service channel (“Old Arrangement”).
Under the Old Arrangement, service was conducted through a centralized, high-level administrative process. Requests were channeled through the High Court of Hong Kong and the various Higher People’s Courts in the Mainland. While this provided a stable and fixed legal basis, it somehow lacked flexibility in the rapid expansion of cross-border commerce. Practitioners often experienced delays in attempting service, leading to additional costs and procedural uncertainty.
The limitations of the Old Arrangement became even more pronounced during the COVID-19 pandemic, which highlighted the gradual obsolescence of a system that solely depended on physical transmission and personal delivery. After 27 years of implementation, the Old Arrangement deserves a full review and upgrade. The New Arrangement enhances the service process through retaining the core entrustment mechanism and adding diverse means to ensure timely and effective service.
The New Arrangement: Scope and Multimodal Framework
The New Arrangement applies to judicial documents in civil and commercial proceedings where service must be effected across the border. Article 2 defines “civil and commercial proceedings” broadly, encompassing matters that are civil or commercial in nature under the laws of either jurisdiction (with only a few exclusions). The types of litigation-related documents covered are exhaustive, ensuring that practitioners can utilize the Arrangement at every stage of legal proceedings, from the originating process to the enforcement of judgments.
Article 3 introduces the revolutionary principle of multi-modal service, allowing for court-to-court entrustment, electronic service, postal service, service by authorized persons, and public announcement. The advantages of a multi-modal service regime are two-fold.
First, there was only one option under the Old Arrangement i.e. through the courts, yet there are various options for means of service under the New Arrangement.
Second, these modes can be used in parallel. If a plaintiff attempts service via multiple channels, the date of service is determined by whichever mode first achieves successful delivery. This eliminates the previous “wait-and-fail” cycle, allowing parties to pursue the most efficient path to commencing their action.
Option 1: Electronic-supported Court-to-court Entrustment
While the New Arrangement expands service options, court-to-court entrustment remains a vital pillar of mutual assistance. Article 4 decentralizes this process, allowing the Supreme People’s Court to authorize certain intermediate people’s courts and primary people’s courts to entrust service directly to the High Court of Hong Kong, following consultation with the Hong Kong Judiciary.
Articles 5 and 6 lay out the standards for electronic transmission and language. Judicial documents transmitted electronically between courts are now granted the same legal effect as physical originals. To prevent procedural errors, the entrusting court shall produce a letter of entrustment in Chinese when requesting for service of judicial documents. If the underlying judicial documents are in English or another language, they must be accompanied by a Chinese translation. Furthermore, when serving a Hong Kong registered company, the letter of entrustment must include a printed copy of the company’s latest registered address from the Hong Kong Companies Registry, ensuring that documents reach the correct legal entity.
Option 2: The Digital Leap – Electronic Service
The gist of the New Arrangement is the inclusion of electronic service. Article 14 permits service via facsimile, electronic mail, mobile communications, and other instant-receipt systems, provided that receipt by the intended party can be ascertained. This provision effectively brings electronic means into the formal legal framework of cross-border litigation, provided one of the specific conditions of (i) express consent, (ii) voluntary provision or (iii) acceptance by conduct are met. Please refer to the table of descriptions of each specific condition for electronic service.
Electronic service may be helpful as personal service via the Mainland courts under the Old Arrangement may sometimes be unsuccessful. Besides, electronic service would cater the modern reality that parties travel across the whole country and no longer base in a particular city or fix oneself to a particular address.
Options 3-5: Other Means of Service
Postal Service and By Leaving
Beyond digital channels, the New Arrangement formalizes postal service and service by authorized persons, providing a robust set of alternatives to court bailiffs. Under Article 8, the courts in Hong Kong and Mainland may effect service of judicial documents by direct service, postal service, electronic service, service by leaving at the addressee’s place and service by public announcement provided in Article 17 of the New Arrangement.
Law Firms or Notarization Institutions
Article 15 also introduces service by third party authorized institution. Mainland courts may authorize service in Hong Kong by Hong Kong law firms or registered foreign law firms. Conversely, Hong Kong parties may effect service in the Mainland through Mainland law firms or notarization institutions. Instead of waiting for court-to-court entrustment, parties can use a designated professional to attempt service directly, which can facilitate the legal proceedings and reduce delay in service.
Public Announcement
When all direct attempts to serve on the recipient fail, Article 17 provides for service by public announcement. Service by public announcement is deemed effective 60 days after the date of publication. This 60-day period is a standardized timeframe that provides legal certainty for the court to move forward with the proceedings, even if party remains absent. From our firm’s experience, service of documents under the Old Arrangement may take more than 60 days.
Transitioning the Legal Framework: From Old to New Arrangement
The New Arrangement is a treaty-like agreement that requires implementation through domestic law. In Hong Kong, it requires amendments to rule 5A of Order 11 in Rules of the High Court which currently prescribes the rigid court-to-court process for serving writs in the Mainland.
The New Arrangement would only take effect once the legislative procedures are completed and the Supreme People’s Court has issued its corresponding judicial interpretation. During the transitional period, the Old Arrangement remains in force.
Insights
Legal practitioners, corporate groups and cross-border business entities are advised to stay close with the development and implementation of the New Arrangement. Meanwhile, the following matters would deserve deeper consideration.
First, regarding the specific conditions for electronic service, voluntary provision by the defendant and acceptance by conduct of the defendant might be rare. Therefore, it is imperative that the plaintiff will have the defendant’s prior express consent. Practically speaking, contracting parties who anticipate the potential need of enforcing the contract (and their legal representatives) may consider the incorporation of relevant clauses in advance to record the parties’ express consents for electronic service of legal documents arising from contractual disputes.
Second, as much as the benefits lie on the plaintiffs (or the parties enforcing a contract), the New Arrangement may be less welcomed by defendants as it shorten the time between the plaintiff’s originating documents and the time of actual or deemed service). Defendants on receipt of originating documents, even by electronic service, should seek Hong Kong legal advice as soon as practicable.
Third, there has been legislative discussions on whether, or to what extent, the application and requirements of electronic services of local HK-to-HK service procedures are tallied or synchronized with cross-border service procedures under the New Arrangement. The underlying spirit is that local HK-to-HK service procedures should be no less practicable and effective than cross-border service procedures.
In any event, the ability to efficiently serve judicial documents across the border is essential for managing the complex disputes that inevitably arise in international trade and finance. By aligning the legal mechanisms of the two jurisdictions, the New Arrangement reduces the uncertainty and hurdles in procedures, making Hong Kong an even more attractive seat for arbitration and litigation.
This article is co-authored by our Partner Mathew Liu and our Trainee Solicitor Jaimie Ho.
Disclaimer :
This material is provided for general information only. It does not constitute legal or other professional advice nor constitute any lawyer-client relationship between Sit, Fung, Kwong & Shum and any user or browser. No liabilities are assumed arising from any reliance on the information in this material.
Sit, Fung, Kwong & Shum is a Hong Kong law firm and does not practice or provide legal advice on the laws of other jurisdictions. References to the laws and practice of any other jurisdictions in this material are provided for general reference and comparative purposes only, and do not constitute any advice, opinion or representation on the law or practice in those jurisdictions.
Introduction
In some jurisdictions, a married person entering into a share transaction may be asked to do something relatively uncommon in Hong Kong: provide a signed consent from his/her spouse. In certain jurisdictions such as the Chinese Mainland and some community property states in the United States, certain assets acquired before and/or during marriage may be regarded as community properties jointly owned by the couple. If an individual acquires or sells shares and his/her spouse later asserts a claim to them, say upon divorce, ownership disputes will arise. To mitigate such risks, some jurisdictions have developed the practice of requesting the spouse of the vendor to provide written consent to the transaction and waive any interest in the shares.
Does this practice have any place in Hong Kong? This article examines that question in the context of sale and purchase of shares of a company incorporated in Hong Kong.
What is the Matrimonial Property Regime in Hong Kong?
Separation of property
Hong Kong essentially has a separate property regime. Under section 4(1) of the Married Persons Status Ordinance (Cap. 182) (MPSO), all property belonging to a married woman at the time of her marriage, or acquired by her afterwards, shall belong to her in all respects as if she were unmarried and may be disposed of accordingly. This abolished the common law doctrine of coverture, under which a married woman’s legal identity would merge with that of her husband and the husband would acquire all property belonging to her at the time of the marriage or acquired by her during the marriage. Accordingly, in Hong Kong, each spouse owns and is free to dispose of his/her property, whether acquired before or during the marriage.
Division of assets on divorce
It is when a marriage breaks down that the question of division of assets arises. In divorce proceedings, the court first determines the assets available in the matrimonial pot and then decides how to divide them between the spouses to achieve fairness. It is empowered to make, among others, property adjustment orders for the transfer of properties (such as shares) from one party to the other. The spouses may have signed a pre‑ or post-nuptial agreement regarding how they wish to divide their properties upon divorce. Such agreement will be given appropriate weight by the court with regard to all the circumstances of the case but is not legally binding.
Is Spousal Consent Legally Required for a Valid Share Transfer?
As mentioned above, a married person can hold properties, including cash and shares, as his/her own assets and deal with them independently. Therefore, neither the vendor nor the purchaser needs their spouse’s consent for the share transfer to be legally valid. If, however, the vendor’s spouse has a beneficial interest in the shares (for example, because the vendor holds the shares as a nominee/trustee for the spouse), the solution is not to obtain any spousal consent, but to make the beneficial owner one of the parties to the transaction and the relevant transaction documents.
Can a Party’s Divorce Unravel a Completed (or Pending) Transaction?
Despite the separate property regime, a divorce can technically cast a shadow over an M&A transaction already closed or about to close. This is because of section 17 of the Matrimonial Proceedings and Property Ordinance (Cap. 192) (MPPO), which empowers the court to avoid asset transfers by a spouse that are intended to frustrate potential matrimonial claims of the other spouse.
How section 17 of the MPPO works
If a party to the marriage has made, or is about to make, a disposition of property (such as a transfer of shares or payment of purchase price) with the intention of defeating the other party’s claim for financial provision, the court may make orders to set aside the disposition made or restrain the disposition from taking place. If the disposition (i) took place less than 3 years before the section 17 application or (ii) is about to take place, then so long as the court is satisfied that it has defeated or would defeat the other party’s claim for financial provision, an intention to defeat the claim is presumed.
Risk is remote in normal circumstances
While theoretically speaking every share sale and purchase can be subject to challenge under the MPPO upon the counterparty’s divorce, the risk of it being set aside should be rather remote for most arm’s-length transactions:
When Should Spousal Consent be Considered?
When the alarm bells ring
There are, however, circumstances which might put a party to the transaction on enquiry. For example:
In such situations, legal advice should be obtained on whether to request a spousal consent or waiver from the counterparty before entering into the transaction.
What spousal consent can and cannot do
A signed consent or waiver given by the counterparty’s spouse is unlikely to oust the jurisdiction of the family court or completely prevent the spouse from challenging the transaction under section 17 of the MPPO. Nonetheless, evidence that the transaction was entered into with the spouse’s consent may make it significantly more difficult for the spouse to argue later that the transaction was intended to defeat financial provision claims. In the case of a resulting trust claim, it may also help establish the purchaser’s status as a bona fide purchaser for value without notice, strengthening the “equity’s darling” defence.
Standard protections in M&A deals
Situations warranting a request for spousal consent are expected to be relatively rare. It is not standard practice in Hong Kong to make such a request for every M&A transaction. In the absence of red flags such as those mentioned above, asking a counterparty to provide – and have their spouse sign – a document that contemplates marital breakdown and division of assets between them may be seen as unreasonable and even offensive.
For a purchaser, apart from conducting the necessary legal due diligence, the standard protection is to request customary warranties and indemnities in relation to the vendor’s good title to the shares, free from any third‑party interests. The purchaser can bring a claim for a breach of warranty and/or seek indemnities from the vendor.
For a vendor concerned about the purchaser’s ability to pay, the common solution is to request a guarantee from a person or entity of sufficient financial standing, or a security over other assets.
Does it Make any Difference if the Counterparty has a Matrimonial Domicile in Another Jurisdiction?
Hong Kong follows the lex situs rule for the creation and transfer of property: in general, the validity and effect of a transaction are governed by the law of the place in which the target property is sited. For shares in a Hong Kong company, their transfer should be governed by Hong Kong law and should follow the formalities under Hong Kong law, which does not require any spousal consent of the parties.
However, where a counterparty does not have any or sufficient connections with Hong Kong, that may give rise to other considerations. For example, if the counterparty later breaches the sale and purchase agreement but has no other assets in Hong Kong and has not provided any security, the innocent party may need or choose to enforce a Hong Kong judgment against the counterparty’s foreign assets. It is uncertain whether (and if so, the extent to which) this can be done if the counterparty’s spouse has an interest in those foreign assets under the foreign matrimonial property regime. In such cases, legal advice should be obtained in Hong Kong and the relevant jurisdiction. Therefore, in case there is any serious doubt as to the counterparty’s ability to fulfill its contractual obligations or satisfy a Hong Kong judgment in case of any breach, a party may consider the necessity of other solutions, such as obtaining a guarantee, security or perhaps the counterparty’s prior spousal consent to enforcement against foreign assets in the first place.
Conclusion
While it may be the practice in some jurisdictions to request the counterparty’s spousal consent for a commercial transaction, it is not normally required and adopted for a Hong Kong M&A deal. In certain circumstances, however, such as where a share transaction is to be made at a substantial undervalue or the counterparty’s spouse is known to have contributed to the acquisition of the target company with his/her funds or to the improvement of its value as outlined above, legal advice should be obtained to mitigate the legal risks.
Disclaimer :
This material is provided for general information only. It does not constitute legal or other professional advice nor constitute any lawyer-client relationship between Sit, Fung, Kwong & Shum and any user or browser. No liabilities are assumed arising from any reliance on the information in this material.
Sit, Fung, Kwong & Shum is a Hong Kong law firm and does not practice or provide legal advice on the laws of other jurisdictions. References to the laws and practice of any other jurisdictions in this material are provided for general reference and comparative purposes only, and do not constitute any advice, opinion or representation on the law or practice in those jurisdictions.
