Mergers & Acquisitions:
A Guide to the Proper Execution of Documents under Hong Kong law
Most contracts can be made orally but some need to be in writing. Even contracts which can be made orally are often made in writing so that there is a clear record of the terms of the contract. How are written contracts to be signed? What happens if they are not properly signed?
Written contracts should be executed and delivered. Failure to follow proper procedure for execution and delivery may result in such contracts being invalid or unenforceable and even if valid and enforceable, may affect the rights of parties to those contracts.
For a natural person, execution and delivery is straightforward. The person simply signs the contract to indicate his intention to be bound to it and delivers it to the other party to the contract to communicate his intention. A contract so signed is referred to as a simple contract under the person’s hand.
Particular problems however, arise in the case of agents, companies, which can only act through agents because they are not natural persons, and deeds.
Deeds are specialty contracts which only take effect if formalities prescribed under the law are followed and by which an interest, right, or property passes or is confirmed or an obligation binding on a person is created or confirmed. By law, some written contracts must be entered into as deeds, otherwise they are invalid and unenforceable.
For example, contracts which are not supported by consideration must be executed as deeds because the general rule is that the courts will not enforce promises in the absence of consideration. As a result, failure to properly execute and deliver such a contract as a deed may mean that the contract is invalid and unenforceable. Note that such contract, even though executed and delivered as a deed, may not be enforceable by specific performance.
Equally, for example, legislation mandates that some contracts, such as those for the creation or disposal of an interest in land, must be entered into as deeds. Failure to properly execute and deliver such a contract as a deed may mean that the contract is invalid and unenforceable.
Other written contracts are voluntarily entered into as deeds so that they are regarded as specialty contracts. The limitation period for specialty contracts is 12 years whereas the limitation period for simple contracts is 6 years. As a result, a party to a deed has 12 years from the date of a breach to sue for the breach whereas a party to a simple contract has only 6 years from the date of a breach to sue. In the event of any ambiguity, deeds are generally strictly construed against their maker and in favour of the beneficiary of the deed.
For an individual, as a result of the Conveyancing and Property Ordinance (“CPO”), a deed must be signed in addition to being sealed and delivered. In this regard, the CPO presumes that a document is sealed if the document describes itself as a deed, states that it has been sealed and bears any mark, impression or addition intended to be or to represent a seal or the position of a seal. There is no requirement that a deed be witnessed.
Care should be taken in delivering deeds which are made between 2 parties (or more). Where one party executes the deed and delivers it to the other party, the deed may bind the first party even before the other party executes it unless the delivery is expressly or impliedly conditional upon the other party executing and delivering as well. Where a deed is delivered conditionally, it will take effect retrospectively from the date it was delivered rather than from the date the conditions were satisfied.
Whilst the position has not been authoritatively determined in Hong Kong, it may be that a deed must be executed as a whole physical document. So, for example, it may be that an intended party to a deed cannot pre-execute a signature page of the deed which is then attached to the final deed once the terms of the deed have been finalized.
Hong Kong Companies
The new Companies Ordinance (“CO”), introduced in 2014, establishes a statutory regime for the execution of documents, including simple contracts and deeds. Under the CO regime, a Hong Kong company may execute a simple contract in writing:
in the case of a company with only 1 director, by having it signed by the director on the company’s behalf; or
in the case of a company with 2 or more directors, by having it signed on the company’s behalf by (x) 2 directors, or (y) any director and the company secretary.
The CO regime further provides that a Hong Kong company may execute a written contract as a deed by executing the contract in accordance with the requirements for a simple contract set out above and stating on the contract that the contract is executed and delivered as a deed. Unlike the position for individuals, for a Hong Kong company, a deed need not be sealed. However, if it is sealed, the CO requires that the seal be affixed in accordance with the articles of association of the company. As with the position for individuals, there is no requirement for a witness.
As against a purchaser in good faith for valuable consideration, a written contract which purports to be executed under the CO regime is regarded as having been executed by the company and unless the contrary is proved, is presumed in the case of a deed to be delivered as a deed. To ensure that a contract will purport to have been executed under the CO regime, the contract should state the capacity of the signatories (e.g. “Sole Director” in the case of a company with only 1 director or “Director” for each signatory in the case of a company with more than 1 director) so that it is clear on the face of the contract that the execution complies with the CO regime.
It is significant to note that the CO regime is not exhaustive but permissive. Hong Kong companies may also execute written contracts pursuant to board resolutions in compliance with their articles of association. Thus, for example, assuming no provisions to the contrary in its articles of association, a Hong Kong company may enter into a simple contract in writing by appointing an individual to sign on its behalf even though the individual is not a director and even though there may be 2 or more directors. Similarly, for example, a Hong Kong company may execute a deed by affixing its common seal in accordance with its articles of association pursuant to a board resolution.
Where a Hong Kong company executes a document otherwise than pursuant to the CO regime, the basis of the authority of the signatory or signatories should be stated (e.g. “Signatory Authorized by the Board”) and the articles of association should be checked to ensure that such a signing arrangement is permissible. This will assist in invoking the presumption under the CPO that a contract appearing to be duly executed is presumed to be duly executed unless the contrary is proved.
If a person signs a written contract on behalf of 2 or more Hong Kong companies, the person must sign the contract separately in each capacity. Thus, for example, if Mr. A is a director of both X Co. and Y Co., both of whom are Hong Kong companies party to the same contract, Mr. A must sign once for X Co. and again separately for Y Co. on that contract.
There is some uncertainty as to how corporations incorporated outside of Hong Kong (i.e. foreign corporations) should execute and deliver contracts governed by Hong Kong law. As a general principle, the capacity and authority of a foreign corporation to enter into a contract governed by Hong Kong law is governed by the law of the place where such corporation is formed. Whilst Hong Kong law cannot overcome any defect in capacity or authority under the law of that place, the CPO presumes that until the contrary is proved, a party to a contract has full legal capacity to execute that contract, to bind himself to it and to dispose of or hold any property or rights assigned under that contract.
At the same time, where the contract is governed by Hong Kong law, its validity and enforceability is generally determined by Hong Kong law. In this respect, for simple contracts governed by Hong Kong law, the Corporate Bodies Contracts Ordinance provides that any contract which can be made in writing under hand may be made by a foreign corporation in writing signed by any person acting under the authority of the corporation, express or implied, and if so made, will bind the corporation. As the CPO deems that an instrument which appears to be duly executed is duly executed unless the contrary is shown, the basis for the authority should be stated (e.g. “Signatory Authorized by the Board”) so as to evidence due authority to sign and the constitutive documents of the foreign corporation should be verified to ensure that the signing arrangements are permissible.
For deeds governed by Hong Kong law, under the CPO, in favour of a person dealing with a foreign corporation in good faith, a deed is deemed to have been duly executed if it purports to bear the seal of the corporation affixed in the presence of and attested by:
its secretary or other permanent officer of the corporation and a member of the corporation’s board of directors or other governing body, or
2 members of that board or body.
The position is unclear where the foreign corporation has no seal to affix to a deed and it may be that, as set out in the discussion on agents below, it is desirable for the foreign corporation to appoint, in accordance with the laws of its place of formation, an attorney under a power of attorney to seal the deed in Hong Kong.
Since Hong Kong laws cannot cure defects in capacity and authority, the capacity and authority of the foreign corporation should be checked with local counsel in the jurisdiction where the corporation is formed.
As a general principle, all persons can enter into contracts through agents. Where a person executes a written contract, whether a simple contract or a deed, through an agent, the signature should indicate the basis for the agent’s authority (e.g. “by his attorney”). This is because under the CPO, written contracts which appear to be duly executed are presumed to be duly executed unless the contrary is proved.
An agent signing and sealing a deed on behalf of his principal, whether an individual or a company, must normally be authorized to do so under a power of attorney. If the power of attorney is granted under Hong Kong law, the Powers of Attorney Ordinance (“PAO”) entitles the agent to enter into the deed on behalf of the principal by signing his own name and affixing his own seal. As a result of the CPO, this is so even in the case of a company which may have its own seal.
Powers of attorney granted under the PAO must be under seal. Where a deed is to be governed by Hong Kong law, a foreign corporation executing the deed under seal may do so pursuant to a power of attorney which is not itself given under seal if the power of attorney is valid under the laws of the place where the foreign corporation is incorporated.
The date of a written contract is normally evidence of the date the contract was entered into and the date from which the parties to the contract agree to be bound. Backdating a contract may constitute fraud in that it falsely implies that the contract was entered into at a date earlier than that on which it was actually entered into.
Accordingly, except where a written contract records an earlier contract and the backdating simply reflects the date of the earlier contract, it is preferable to state that a contract is to have retrospective effect from a particular date rather than to backdate the contract. Particular care should be taken in backdating written contracts which must be entered into as deeds. The legal obligations under a deed arise only on execution and delivery. Unlike simple contracts which may have been entered into orally and then recorded in writing, it is impossible for a written contract which must be entered into as a deed to have been entered into orally.
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