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Execution of Documents Ordinance-Recent Developments

The New Companies Ordinance (NCO) will take effect on 3 March 2014, which contains some provisions that will affect the way documents maybe executed. Here we will make a brief summary to review the requirements for executing documents in Hong Kong in light of both the changes in the NCO and the decision in the Mercury case.

1.     Q: What’s the new change in NCO that affect execution of documents?

A: According to the NCO, Hong Kong companies will not be required to have a common seal any more. While in the past, if a company adopts a seal, the seal should be metallic with the companies name engraved in legible form and it should be applied in accordance with the company’s Articles of Association.

 

2.     Q: Under NCO, how could a company execute a document?

A: After the NCO taking effect, if the document of a company is signed by the sole director (in the case of a company with only one director) or by two directors or one director and the company secretary (in the case of a company with more than one director), this document can be executed. And it’s worth noting that no matter  a company does have a common seal or not, it can execute documents in this way and this will have the same effect with executing a document under the company’s common seal.

And where a Hong Kong company executes a document this way without a company seal then purchasers in good faith for valuable consideration will be entitled to rely on that execution as being valid execution by the company.

 

3.     Q: What influence the new provisions have on the execution of deeds?

A: the provision contained in the NCO that a document signed by a company without using a seal and in accordance with the new execution arrangements described above and expressed to be executed by the relevant company “has effect as if the document had been executed under the company’s seal”. This principle’s application to deeds means that the requirement for a deed to be sealed will be satisfied if it is executed this way.

Meanwhile, the common law principle that delivery of a deed is presumed when a deed is executed is also be codified. “Delivery” here does not mean physical delivery, but it is an acknowledgment by the maker of the deed that the deed is binding on it.

 

4.     Q: Is there any question remained unclear under NCO?

A: Unfortunately, the NCO doesn’t  offer a clear answer to whether the formality requirements in execution of a deed is governed by the place of incorporation of the corporation or by the governing law of the document in question (or whether either would suffice)  or prescribe any formalities for deed execution by foreign companies.

 

5.     Q:  Tips for the foreign corporations practice.

A: We recommend that when you are dealing with execution by foreign corporations you should ensure that the execution meets the requirements of each of the following:

a.     The place of incorporation of the foreign company

b.     The governing law of the contract

c.      The place of execution of the document.

So, if the place of incorporation of the foreign corporation executing a deed requires deeds to be sealed with the common seal ,the common seal should be used.

          The reality of doing business globally often means that arranging a traditional signing meeting with all parties physically present can be logistically difficult, especially for transactions with multiple signatures in different locations. A practice has evolved in several jurisdictions of signing signature pages in advance of finalizing the terms of an agreement and then affixing the signed pages to the final form of the document once it is finalized. This is a common practice in Hong Kong and the PRC. The Mercury case has raised doubts over the effectiveness of this practice and stimulated much debate on the proper way to achieve a virtual signing or closing.

6.     Q: What’s the specific doubt that the Mercury case raised?

A: This case raised the question whether signing signature pages which are separated from the whole document and then attached to the remainder of the complete document constitutes valid execution. In this case, it was held that attaching signature pages from an earlier version of a deed to a materially changed final version of a deed is not an effective execution of that deed.

 

7.     Q: What impacts does this case have on the execution of documents?

A: This case caused considerable concern about the process of arranging the signature and execution of legal documents, the problems arises when the parties are not physically present in the same location and execution documents are exchanged electronically.

Here’re the problems:

a.     Should parties insist on physical signing meetings? And if not,

b.     In the case of a delivery by email, should the signatories print and return the entire document, or simply the signature page?

What important is , the Mercury case dealt specifically with the execution of deeds.

8.     Q: Tips for practice.

A: As a result, many firms have adopted the following approach:

·         When signing deeds (and contracts required to be in writing such as guarantees), each party should print the document in full and sign the complete document.  The entire signed document should be returned as a pdf (by email) or a fax and also in hard copy to the lawyers arranging the closing; and

·         When the documents to be signed are simple contracts, as agreed between the parties, each party can print the entire document, or simply the signature page, and sign the signature page.  As agreed with the other parties, either the entire document, or the signature page alone should then be returned as a pdf (by email) or a fax and also in hard copy.

We recommended following this approach.  However, where time is of the essence, a party can return the signature page as a separate pdf (by email) or fax, but the entire document should also be returned with the original signature page attached as soon as possible thereafter.

 

We also recommend putting in place powers of attorney as early as possible if it is likely that there will be signatories in different locations.  Deeds which require registration with registries such as the Hong Kong Companies Registry must have original or ‘wet ink’ signatures from all parties and powers of attorney may enable this where the exchange of electronic counterparts may not, or may delay the registration.

        Other than the changes on execution of documents, the NCO also includes some new provisions about effectiveness of the contracts that are contrary to the company’s object.

9.     Q: What’s effectiveness of contracts that are contrary to the company’s object?

A: In accordance with the NCO, a company is no longer required to state its objects in its constituent documents. However, a Hong Kong company whose objects are stated in its constituent documents is still not permitted to act beyond these stated objects. Nevertheless, an act by a Hong Kong company is not invalidated merely because it contravened its objects clause.

 

10.                         Q: What’s the shareholders’ remedy if the company acts contrary to its objects?

A: In this case, a shareholder of the company could has the right to restrain the company from acting contrary to its objects through seeking an injunction. However, such proceedings may be brought only if issued before the company has entered into such contract.

11.                        Q: How does the NCO protect the person dealing with the company?

A: Under the NCO, a person dealing with the company in good faith will be entitled to enforce the contract which is contrary to the company’s objects clause. In this way, it is said that the objects clause affects the exercise of capacity, but not the legal capacity itself. The NCO also describes that a person dealing with a company is presumed to have acted in good faith. Interestingly, unlike the presumptions in relation to execution of documents discussed above, this presumption does not require them to be a purchaser for valuable consideration.

         While the NCO has make a step to bring Hong Kong law into line with other jurisdictions in a number of areas relating to the execution of documents, there are still aspects of the law which are unclear and it remains to be seen how the companies interpret the law.  To ensure best practice and minimize risks, the execution of documents in complicated, international transaction scenarios should be considered early and you should seek advice from Hong Kong and local counsel as relevant.

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