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.

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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.  

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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.

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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:

• For a transaction completed for more than 3 years, there is no presumption of intention to defeat financial provision claims.  It can be quite difficult for the applicant to satisfy the evidential burden of proving an actual intention.
• For a transaction about to close or completed within 3 years, the presumption applies but it is rebuttable.  This should not be overly concerning in most cases where the deals are negotiated on an arm’s length basis.  Case law shows that where disponors fail to rebut the presumption, it is usually due to highly suspicious timing and circumstances of the transfers (such as transfers to close relatives shortly before divorce) or inconsistencies and improbabilities in their explanations.
• More importantly, section 17(2) of the MPPO offers protection to a third party: if the transaction was for valuable consideration and, at the time of the transaction, the third party acted in good faith and without notice of any intention on the counterparty’s part to defeat financial provision claims, then the court is not to set aside the transaction as against that third party.

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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:

• there is reasonable cause to suspect that the counterparty enters into the transaction to dissipate his/her assets;
• the transaction is at a substantial undervalue or is otherwise not made on an arm’s-length basis;
• the transaction is not made between independent third parties; 
• the vendor’s shares are known to be acquired with his/her spouse’s funds – potentially giving the spouse a beneficial interest in the shares by way of resulting trust; and/or
• the vendor’s spouse is known to have made substantial contributions to the improvement of the value of the target company – potentially giving the spouse an interest in the company’s share under section 9 of the MPSO.

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.

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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.

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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.

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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.

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