ABOUT THE AUTHOR: Steve Meiklejohn TEP is a
Partner at Ogier Jersey and Kristy Calvert is Managing Partner at
Ogier Shanghai
Ogier's Shanghai office, opened in July 2011, made it the first
offshore firm to have a branch in mainland China. This article
explores Ogier’s experience up to the first anniversary of its
office opening, what we think will be necessary for offshore to
succeed in China, and key elements of China’s trust law. We
conclude that there is a bright future for the offshore trust in
China.
Ogier’s experience in China
The Ogier Shanghai office works closely with other branches,
particularly the Hong Kong team, as Hong Kong is likely to be the
preferred listing destination for Chinese clients, with Singapore
more attractive for clients in south-east Asia.
What are we finding out as we do business in China? The biggest
thing we have discovered so far is that the Chinese set great store
by personal relationships and face-to-face meetings. This means
opening an office, rather than merely conducting marketing trips
from Hong Kong, is invaluable. We have also learnt that it is vital
to be able to communicate in the client’s own language, usually
Mandarin. Also, lawyers need to be creative and flexible in their
structuring. Ideally, as well as using an offshore vehicle such as
a company, trust or partnership, link to a local structure. In the
face of uncertain Chinese regulations, a local vehicle can provide
comfort to the client and help you comply with those uncertain
regulations.
Offshore vehicles
There is an increased appetite for using offshore vehicles for
pre-IPO entities to list offshore. Jersey vehicles in particular
are used for London listings. With China’s growing economy,
renminbi funds seem more popular than USD funds, and clients are
more prepared to structure such funds using offshore vehicles.
Further, Chinese people have experience of using offshore vehicles
to pool private equity investments with friends or business
associates. This has led to litigation (for instance shareholder
disputes) in offshore courts, the BVI in particular.
High-net-worth clients are becoming more aware of the value of
offshore trusts and fiduciary structures. The Chinese wealthy tend
to be younger than the wealthy elsewhere, but they are still
starting to see how a trust can prevent business fragmentation and
transfer wealth between generations. Also, China has had its own
trust law since 2001, which gives Chinese clients a familiarity
with the concept that, for instance, most Europeans lack.
China’s trust law
Under China's trust law, the settlor entrusts property to the
trustee, who will administer or dispose of it in the interest of a
beneficiary or purpose. Trusts must be in writing, connecting
Chinese trust law to contract law. This, combined with the
prominence of the settlor, creates a tripartite trust
relationship.
As with other Asian civil-law countries that have embraced the
trust, the settlor keeps certain rights after the creation of the
trust. These include:
- A right of access to information, including trust income and
expenses.
- A right to request explanations of the trustee’s
activities.
- If the trustee is in breach of trust, the settlor can apply to
the People’s Court to annul dispositions and ask the trustee to
restore the property or make compensation.
- The equivalent of a first-limb Barnes v Addy knowing-receipt
provision. Where a transferee of trust property accepts the
property in knowing violation of the trust’s purposes, they shall
return the property or make compensation.
- The settlor may ask the trustee to modify the methods for
administering the trust if the existing methods are not
favourable.
The trustee must abide by the trust documents and handle trust
business in the best interests of the beneficiaries. They must be
careful in their duties and must fulfil their obligations with
honesty, good faith, prudence and efficiency.
A beneficiary may exercise the same rights as the settlor. If,
while exercising those rights, a beneficiary disagrees with the
settlor, they may apply to the People’s Court for a decision.
The contractual nature of Chinese trust law shapes the
relationships of the parties to the trust. Trustee and beneficiary
enjoy similar rights as under common law, but the settlor’s role is
different. The settlor has all the rights of the beneficiary, and,
as they can remove the trustee if that trustee is guilty of gross
negligence, they may be the most powerful party to the trust.
Conclusion
There is certainly an appetite for offshore products – trusts in
particular. We are beginning to see the fruit of our labours and
are excited at the prospect of extending our links with China.