Alert 336 Hong Kong - shadow companies amendments brought forward


The Hong Kong Government recently issued a set of legislative proposals dealing with the problem of 'shadow companies', slated to be introduced into a new bill amending the Companies Ordinance. The proposals were developed following the conclusion of a public consultation on the problem and, if all goes well, are expected to become law in the second half 2010. The timescale for the amendments has been brought forward due to a growing recognition of the scale of the problem posed by shadow companies to brand owners.

Background
The problem of shadow companies was discussed in Alert 281. Essentially, intellectual property (IP) infringers in China and elsewhere take advantage of the ease of registering companies in Hong Kong in order create companies with names similar to famous brands. These shadow companies can then issue official-looking documents, such as trade mark licences, to infringers, complicating enforcement against them.

The problem can be dealt with one of three ways:

  1. By asking the companies registrar to change the company's name because it is 'too like' that of another company - but this only works in the first 12 months after registration;
  2. By requesting the registrar to strike off the company for being defunct - but the applicant has a very high burden of proof to show that the company is not carrying on any business, worldwide;
  3. By suing the shadow company for trade mark infringement or passing off.

Because dealing with the registrar is often difficult, due to its strict interpretation of its powers, court action is often preferred. In most cases the absent directors will not contest proceedings, so default judgment can be obtained relatively quickly. But at present, company names can only be changed by shareholders' resolution and naturally the shareholders are also absent and do not act.

Cleverly drafted court orders have been deployed to get around this: for instance, they may give the rights holder's solicitors power to sign the name change resolution if the shareholder defaults. But obtaining such court orders is time consuming and costly, and not always reliable.

The Proposals
The proposed amendments to the Companies Ordinance attempt to improve the situation, by empowering the registrar, on receipt of an appropriate court order, to direct that a company change its name. Where the company fails to do so, the registrar will itself be able to change the infringing company name to the company's registration number (i.e. '1234567 Limited').

The proposal will form part of a new draft bill, expected in Q4 2009. This bill was scheduled to become law in 2011/12, but is now expected for mid-2010. The date was brought forward once the Government recognised the seriousness of the shadow company problem: consultation respondents urged change, as did the Japanese and United States (US) Governments, who were concerned that Hong Kong's shadow companies are facilitating infringement in China and frustrating enforcement efforts.

Our Comment
The amendment to deal with the shadow company problem is a sensible one and in line with similar laws adopted in other common law countries such as Singapore, Canada and Australia. However, the Government stopped short of giving the companies registrar full power to adjudicate cases itself, a model recently introduced in the United Kingdom. They also refused to include provisions allowing arbitration of disputes along the lines of the UDRP system, which would be cheaper than litigating cases. Although those models were widely welcomed by brand owners and IP practitioners there, the Hong Kong Government decided it was too early to tell how successful they would ultimately be and will keep the situation under review. In the meantime, the new amendments should still go some way towards making it easier and cheaper to tackle shadow companies in Hong Kong.