Ogier in China: a case study

  • Author : Steve Meiklejohn
  • Author : Kristy Calvert
  • Date : August/September
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.


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