Hong Kong

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Pre-contractual negotiations
  • Is there a duty to continue to negotiate

    A duty of good faith in contractual negotiations is not generally recognised in Hong Kong law. Even where parties explicitly agree to negotiate in good faith, this is not an agreement that will generally be enforced in Hong Kong (the courts being reluctant to fetter the freedom of the parties to negotiate). Pre-contractual negotiations are not normally legally binding on the parties and, in general, either party may terminate negotiations when it chooses.

    Consequences of termination of negotiations

    In general, either party may terminate negotiations when it chooses, and there will be no liability for termination of pre-contractual discussions.

    In exceptional circumstances, a party may be able to claim damages if during the course of protracted discussions and negotiations (where both parties had given the impression that a deal would definitely be done), a party had started implementation work for the relevant transaction and the discussions had subsequently been terminated by the other party.  

Confidentiality agreements
  • Is there an implied duty of confidentiality?

    As a general principle under Hong Kong law, where a person has received information in confidence that person may not take unfair advantage of it. The ability to rely on this common law position depends on the satisfaction of a number of conditions and its extent and application are uncertain. It is therefore advisable for parties to enter into written confidentiality agreements or undertakings to ensure that they agree the scope of information which is to be treated as confidential and conditions for its treatment, use and return.

    Written agreements

    It is important to word confidentiality agreements carefully, bearing in mind that a promise (including a promise to keep information confidential) will not be legally binding unless it is either executed as a deed or the promise is supported by consideration (something in return). For example, in return for one party agreeing to provide information the other party agrees to keep the information confidential.

    Breach of a confidentiality agreement may entitle the non breaching party to seek injunction against the breaching party or to claim damages from the breaching party, to the extent that the non breaching party is able to show it has suffered loss as a result of the breach. It is possible for the confidentiality agreement to provide for a certain monetary amount (ie liquidated damages) to be payable in the event of a breach. But, any liquidated damages must represent a real assessment of likely damages and not constitute a penalty, to avoid being unenforceable.

Exclusivity arrangements
  • Hong Kong law does not imply exclusivity in negotiations and therefore parties seeking exclusivity would normally enter into an exclusivity agreement. Such an agreement is not legally binding unless it is either executed as a deed or is supported by consideration (eg mutual exclusivity obligations or the payment of consideration). Breach of an exclusivity agreement may entitle the non-breaching party to damages, to the extent that the non-breaching party is able to show loss caused by the breach. As breach of an exclusivity agreement is unlikely to give rise to readily determinable damages, the parties may choose to insert a liquidated damages clause in the exclusivity agreement but should take care to ensure that it does not constitute a penalty to avoid it being unenforceable.

    It is important to ensure that any exclusivity agreement is expressed as a “lock out”, namely that the party concerned will not negotiate with any third party for a specified period, rather than a “lock in”, where there is a positive duty to negotiate, as a lock in will generally not be enforceable for lack of certainty.

    The agreement should also not be for an indefinite period, or until signature of a transaction (as this will effectively be a lock in); but should be limited to a reasonable fixed period, for example, two to three months.

Heads of agreement
  • Are they legally binding?

    For a document to be legally binding it must be sufficiently "certain" (ie clearly set out the agreement between the parties, the object of the transaction and its terms), it must not merely be an "agreement to agree".

    Heads of agreement would not normally be legally binding as they would usually not be sufficiently "certain". This is because, in general, a heads of agreement will not set out in full all the terms of the transaction, will state items that require further discussion and will not contain sufficient agreement or precise terms to be considered certain. However, it should be borne in mind that a document which contains extensive detail as to a transaction and its terms may (at least in the absence of specific provisions stating its non-legally binding status) constitute a legally binding agreement.

    In order to reduce the possibility of a heads of agreement being held to be binding, it should clearly state that it is subject to contract and include a clause which states that it is not intended to be legally binding.

    Where heads of agreement contain confidentiality and/or exclusivity arrangements or arrangements with respect to costs (eg break fees), it is usual to state that only these particular clauses (and any governing law clause) are intended to be legally binding.

    Consequences of breach

    In the event that a party breaches the terms of a legally binding heads of agreement, the other party may be entitled to seek specific performance or damages to compensate him, provided he can show loss caused by the breach, in the same way as for any breach of contract.

Break fees
  • Break fees are usually payable on the occurrence of specified events which prevent the transaction from completing. Break fees are not particularly common in private M&A in Hong Kong.

    The directors of a company that is liable to pay the break fee should consider whether the payment of break fees is in the best interests of the company and its members as a whole. Where it is the target company which pays the break fee, the directors will also need to consider whether agreeing to pay the break fee is reasonably necessary to facilitate the proposed transaction. A break fee may be regarded as unlawful financial assistance under the Companies Ordinance, although this will not be the case where the break fee does not materially reduce the company’s net assets.

    In certain circumstances, eg Hong Kong public company takeover deals, the break fee must be de minimis (normally no more than 1% of the offer value).

    Where the company paying the break fee is listed on the Hong Kong Stock Exchange, disclosure of the payment may be required under the continuous disclosure rules, the notifiable transaction rules or, where the payer and the recipient are connected, under the connected transaction rules.

    Where a break fee is payable on breach of contract it must be no more than a genuine pre-estimate of the loss of the innocent party, so as to constitute and avoid being treated as a penalty, and so be unenforceable.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.