NOMURA FUNDS IRELAND PLC v. THE COLLECTOR OF STAMP REVENUE

DCSA 4/2017

[2019] HKDC 406

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

STAMP APPEAL NO 4 OF 2017

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DECISION

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INTRODUCTION

1.  This is an appeal by way of Case Stated against the stamp duty assessment made by the respondent The Collector of Stamp Revenue (“the respondent”) on 13 January 2017 whereby he had assessed the stamp duty payable by the appellant Nomura Funds Ireland Plc (“the appellant”) on an instrument titled ‘Common Merger Proposal’ (“Merger Proposal”) in the sum of HK$627,216.

BACKGROUND

Factual Background

2.  The background of the case is not in dispute.  They appear in the Case Stated prepared on behalf of the respondent and the summary of facts prepared by the respondent’s counsel in his written submissions. I would respectfully adopt them below, with appropriate modifications where appropriate.   

3.  The appellant is an investment company incorporated in Ireland.  It is structured as an umbrella fund consisting of different sub-funds.  The assets of each sub-fund will be invested separately on behalf of each sub-fund in accordance with the investment objective and policies of such sub-fund.

4.  Nomura Funds Ireland - China Fund (“the Receiving Sub-Fund”) is one of the sub-funds of the appellant.

5.  The appellant is authorized by the Central Bank of Ireland as a UCITS, ie an ‘Undertaking for Collective Investment in Transferrable Securities’ established pursuant to Council Directive 2009/65/EC (“EU Directive”) published by the European Union (“EU”) on 13 July 2009.  UCITS are in essence undertakings with the sole object of collective investment in transferrable securities or other liquid financial assets of capital raised from the public, operating under the principle of risk-spreading.

6.  Nomura Funds which are based in Luxembourg (“Nomura Luxembourg”) is an investment company incorporated in that country.  It is a UCITS established in Luxembourg.  At the relevant time, the sole active sub-fund of Nomura Luxembourg was ‘Nomura Funds - China Opportunities’ (“Merging Sub-Fund”), and the investments in the Merging Sub-Fund consisted entirely of securities listed on the Hong Kong Stock Exchange (“HK Securities”).

7.  By the Merger Proposal, Nomura Luxembourg and the appellant agreed to merge the Merging Sub-Fund in the Receiving Sub-Fund with effect from 27 April 2015 (“Merger”).

8.  The following are the key terms of the Merger Proposal:-

(1)   The Merger shall be effective on 27 April 2015.

(2)   On the effective date, in accordance with Article 1(20) (a) of the Luxembourg law of 17 December 2010 relating to undertakings for collective investment (“the Luxembourg Law”):-

(a)   the Merging Sub-Fund will transferall of its assets and liabilities to the Receiving Sub-Fund as a contribution in specie, in exchange for shares in the Receiving Sub-Fund to be issued to the sole shareholder of the Merging Sub-Fund^[1];

(b)   the shares of the Merging Sub-Fund will be cancelled, and Nomura Luxembourg shall cease to exist.

(3)   The Merger is subject to the approval of the shareholder of the Merging Sub-Fund.

9.  Article 67(1) of the Luxembourg Law provides that where the merging UCITS is established in Luxembourg (in our present case, the Merging Sub-Fund), its merger with another UCITS (in our present case, the Receiving Sub-Fund) is subject to the prior authorization by the Commission for the Supervision of the Financial Sector (“CSSF”) in Luxembourg.

10.  On 12 March 2015, the CSSF notified Nomura Luxembourg that it had no objection to the implementation of the Merger.

11.  On 9 April 2015, the sole shareholder of the Merging Sub-Fund passed a resolution to approve the Merger.

12.  On 27 April 2015, the Merger took place.  

13.  Nomura Luxembourg ceased business on the same day and was de-registered on 18 May 2015.

Substantive issue in dispute

14.  The resolution of this appeal ultimately turns on one single question, namely, what was the effect of the Merger Proposal?  

15.  Or, in the words of the appellant’s solicitor Mr Stefano Mariani, who represents the appellant in the appeal, was the Merger Proposal an instrument chargeable with Ad Valorem Stamp Duty (“AVSD”) under Head 2(3) of the First Schedule by virtue of being a transfer made for the purposes of effectuating a transaction whereby or under which beneficial interest in the HK Securities passed to Nomura Ireland, and not otherwise exempt from AVSD?

16.  I would refer to the above issue as the “Substantive Issue” in this Decision.

DISCUSSION

The relevant local statutory provisions

17.  Section 4(1) of the Stamp Duty Ordinance, Cap 117 (“SDO”) provides that “every instrument, wherever executed, specified in the First Scheduleshall be chargeable with the stamp duty”.  

18.  Head 2 of the First Schedule of SDO refers to instruments relating to Hong Kong stock, and Head 2(3) states:-

“TRANSFER operating as a voluntary disposition inter vivos or made for the purpose of effectuating a transaction whereby the beneficial interest in Hong Kong stock passes otherwise than on sale and purchase, including a foreclosure order.”

The relevant Luxembourg Law

19.  Article 1(20)(a) of the Luxembourg Law^[2]is a definitional section, which the appellant submits “relevantly” provides that a “merger” means:-

“one or more UCITS or investment compartments thereof, the ‘merging UCITS’, on being dissolved without going into liquidation, transfer all of their assets and liabilities to another existing UCITS or an investment compartment thereof, the ‘receiving UCITS’, in exchange for the issue to their unit-holders of units of the receiving UCITS and, if applicable, a cash payment not exceeding 10% of the net asset value of those units.”

20.  Although there are two other means by which a merger may be effected within the meaning of Article 1(20) of the Luxembourg Law, the appellant says that the Merger was in fact effected under point (a).

21.  Article 76(1) of the Luxembourg Law^[3] is an operative section, which provides:-

“A merger effected in accordance with point (20)(a) of Article 1 shall have the following consequences:-

(a) all the assets and liabilities of the merging UCITS are transferred to the receiving UCITS or, as the case may be, to the depositary of the receiving UCITS;

(b) the unit-holders of the merging UCITS become unit-holders of the receiving UCITS and, as the case may be, they are entitled to a cash payment not exceeding 10% of the net asset value of their units in the merging UCITS; and

(c) the merging UCITS established in Luxembourg ceases to exist on the entry into effect of the merger.”

The parties’ respective case

The appellant’s case

22.  In essence, the appellant’s case can be summarized as follows:-

(1)   There was no transfer of the HK Securities, but only transmission of the HK Securities to the Receiving Sub-Fund by operation of the Luxembourg Law.  It was the Luxembourg Law, not the Merger Proposal, that had the effect of vesting the HK Securities on the Receiving Sub-Fund.  As such, the Merger Proposal is not a “stampable” instrument under Head 2(3) of the First Schedule to the SDO: (See §24.1 of the appellant’s Skeleton Argument).

(2)   Alternatively, no beneficial interest in the HK Securities passed under the Merger Proposal as the HK Securities passed under the Luxembourg Law: (See §24.2 of the appellant’s Skeleton Argument).

The respondent’s case

23.  In short, the respondent’s case is that the Merger Proposal is chargeable to AVSD under s 4(1) and Head 2(3) of the First Schedule to the SDO as a transfer because it was:-

(1)   operating as a voluntary disposition inter vivos; or

(2)   made for the purpose of effectuating a transaction whereby the beneficial interest in Hong Kong stock passes otherwise than on sale and purchase.

The “Prior Issue”: is the case a matter of Luxembourg Law?

24.  The appellant contends that there is a “prior issue” for the court to decide in this case. 

25.  The appellant claims that the Merger took place under and in accordance with the laws of Luxembourg and the EU and not Hong Kong law (“the Prior Issue”).  

26.  The appellant contends that it is a well-established principle at common law that foreign law is a matter of fact to be pleaded and proved (see for example Ottoman Bank of Nicosia v Chakarian (No.2) [1938] AC 260 (PC), at 279).  The appellant says that there are before the court two unchallenged expert opinions issued by Luxembourg counsel on certain matters of EU and Luxembourg corporate law and the application of the Directive.  Specifically, Luxembourg counsel came to, inter alia, the following conclusions:-

(1)   The Merger under the Merger Directive and the Luxembourg Law was a merger by way of universal succession, whereby Nomura Ireland succeeded by operation of law to all the assets and liabilities of Nomura Luxembourg, which was subsequently dissolved without liquidation.

(2)   The transmission (as contrast to a “transfer” in law) of the assets of Nomura Luxembourg to Nomura Ireland was a consequence and not the cause of the Merger; thus, the Merger was procedurally prior to the said transmission of assets, which was the only legally mandated consequence of the Merger taking effect under the Luxembourg Law.  In other words, first there was a merger as defined in Article 1(20)(a) of the Luxembourg Law and then (and only then, albeit by a scintilla of time), did there follow by way of statutorily mandated consequence under Article 76 of the Luxembourg Law, the vesting of all assets and liabilities of the merging company in the merged company.

(3)   Article 76(1) of the Luxembourg Law was the provision of law which operated to vest the assets and liabilities of Nomura Luxembourg in Nomura Ireland; by extension, the first and sole cause of the transmission of assets from Nomura Luxembourg to Nomura Ireland was Article 76 of the Luxembourg Law.

(4)   The Merger Proposal is not a contractual instrument, it is a regulatory document and is incapable of effectuating a transfer of property.

27.  The appellant claims that the opinions of Luxembourg and EU law summarized above were given by Luxembourg counsel without reservation.  In the absence of alternative expert evidence, the appellant says that they should be taken by the court as evidence of the true legal mechanism and effects of the Merger under its proper law.  The appellant further claims that the respondent does not dispute Luxembourg counsel’s competence to opine on such matters of Luxembourg and EU law.

28.  The appellant further submits that a corollary of the Prior Issue is that the existence and the incidents of a company’s personhood, and any change thereof, are governed by the laws of the jurisdiction of its incorporation (Lazard Brothers & Co v Midland Bank Ltd [1933] AC 289 at 297 - 298 per Lord Wright).  By extension, the question of whether a given operation of foreign law vests assets in a person by universal succession or otherwise is, strictly, a matter of the proper law of the said operation.

29.  Hence, the appellant submits it would follow that the incidents of the Merger and, in particular, its effects on the corporate personalities of Nomura Luxembourg and Nomura Ireland, and the legal machinery by which the assets of Nomura Luxembourg, relevantly including the HK Securities, were vested in Nomura Ireland are matters of Luxembourg and EU Law, which, having been evidenced in unambiguous terms by Luxembourg counsel, should in the respectful submission of Nomura Ireland be accepted by this court as proven matters of fact.

Ruling on the Prior Issue

30.  I shall first dispose of the Prior Issue here and then deal with the Substantive Issue under a separate heading below.

31.  In my judgment, there is no basis for the appellant to say that it was the Luxembourg Law, not the Merger Proposal, that effected the transfer of the HK Securities from the Merging Sub-Fund to the Receiving Sub-Fund.

32.  First, in my view, the starting point of looking at the document must be the Merger Proposal itself.  In it, it clearly states that for the transfer of the assets and liabilities of the Merging Sub-Fund to the Receiving Sub-Fund is to be done “in accordance with” (as contrast to “by operation of”) the terms of Article 1 (20)(a) of the Luxembourg Law: See paragraph under the heading of “I.  Type of Merger” in the Merger Proposal[4].

33.  It is to be noted that Article 1(20)(a) of the Luxembourg Law is only one of the three methods for a merger to take place under the Luxembourg Law: See Article 66. The other two methods are set out in Article 1(20)(b) and (c). 

34.  Thus, I find that the Merger Proposal did not provide the Merger was to be effected by operation of law, in particular the Luxembourg Law.    

35.  Second, if one looks at the actual wording employed under the Luxembourg Law, it is clear that the it did not support the appellant’s contention that it was the Luxembourg Law, rather than the Merger Proposal itself, which had effected the transfer. 

36.  Mr Mariani submits that Article 76 (1) was the provision which affected the transfer of the HK Securities[5].

37.  With respect, I do not agree. 

38.  In my view, that particular Article only sets out the consequences of a merger that has been effected in accordance with Article 1(20)(a) of the Luxembourg Law, including the transfer of all assets and liabilities of the merging UCITS to the receiving UCITS. 

39.  Nothing in Article 76 (1) says that the transfer of assets in a merger is to be effected by operation of law.  

40.  I agree with Mr Chang for the respondent that the above interpretation of the Luxembourg Law is supported by the EU Directive, based on which of course the Luxembourg Law was enacted.  In particular, I agree with Mr Chang of the following points he has made in his written submissions:-

(1)   Recital (28) provided that the EU Directive was concerned with merger techniques commonly used in the Member States.

(2)   Article 38 required Member States to allow for cross-border and domestic mergers in accordance with one or more of the merger techniques in Article 2(1)(p)(i)-(iii) of the EU Directive which later became Article 1(20)(a)-(c) of the Luxembourg Law.

(3)   It follows that the subject transfer of HK Securities was resulted from a merger technique introduced by the Luxembourg Law, rather than resulted by operation of any provisions of the Luxembourg Law.  Put in another way, the Luxembourg Law operates to recognize the transfer of assets resulting from a merger under one of merger techniques introduced by the Luxembourg Law, rather than operates to transfer the assets under the merger in question.

41.  In his submission, Mr Mariani makes the point that the opinions of the Luxembourg counsel should be accepted by the court without reservation.  In particular, he submits that “(I)n the absence of alternative expert evidence, they should be taken by the Court as evidence of the true legal mechanism and effects of the Merger under its proper law.”[6]

42.  With due respect, I cannot accept such bold submission. 

43.  In this regard, I agree with Mr Chang that the court does not simply accept any stated opinion based on foreign law as being correct, even when there may be no legal opinion contradicting it.  The court is entitled to, and indeed must, look at the basis of the legal reasoning and the relevant foreign statutory provisions in determining what weight, if any, should be given to the expert opinion: Full Wisdom Holdings Ltd & Others v Traffic Stream Infrastructure Co Ltd & Others [2004] 2 HKLRD 1016 at [23] per Le Pichon JA.  A foreign law expert is obliged to set out not only his conclusion, but also the source materials, legal principles, and importantly his process of reasoning leading to that conclusion: Newmark Capital Corp Ltd v Coffee Partners Ltd [2007] 1 HKLRD 718 at [47] per Recorder Paul Shieh SC.

44.  I note here that the first opinion obtained by the appellant dated 5 November 2015 (“the First Opinion”) stated that “the Merger was effected in accordance with and by operation of Article 1(20)(a) of the Luxembourg Law[7]. However, this statement was made without any elaboration or explanation by the Luxembourg counsel.  I also note that the First Opinion had identified Article 1(20)(a), rather than Article 76(1) now relies upon by the appellant, as the provision that purportedly effected the Merger.  The apparent difference in such opinion again has not been explained. 

45.  I also agree with the respondent’s observation that, whilst the second opinion dated 19 April 2016 (“the Second Opinion”) stated that “it is the operation of Article 76 that effects the transfer of the assets of the merging fund to the merged fund”, there was no explanation as to why the First Opinion previously identified Article 1(20)(a) alone as the operating provision.  More importantly, there was no elaboration in the Second Opinion as to why it was Article 76 of the Luxembourg Law, not the Merger Proposal, that effected the transfer of the HK Securities.  In this connection, I agree with Mr Chang’s observation that just because Article 76 “tells you what happens when a merger is approved by the CSSF and so effected” does not logically mean the Merger was effected by that Article.

46.  I further agree with the respondent that the Second Opinion barely asserted that the Merger Proposal, in and of itself, is “incapable of transferring property from the merging fund to the merged fund”.  No basis for such assertion was made.  No relevant Article in the Luxembourg Law or any relevant Luxembourg law was identified.  I agree with Mr Chang’s submission that such assertion was also not supported by a plain reading of:-

(1)   the Merger Proposal itself;

(2)   Article 67(1) of the Luxembourg Law providing that a merger involving a Luxembourg UCITS is subject to prior authorization by the CSSF, rather than requiring the CSSF to effect the merger and the underlying transfer of assets;

(3)   the letter from the CSSF clearly stating that it had “no objection” to the implementation of the Merger under the Merger Proposal, rather than the CSSF itself effecting it; and

(4)   Article 76(1) of the Luxembourg Law.

47.  Based on the above reasons, I reject the appellant’s contention (and the Luxembourg counsel’s opinions) that the transfer of the Merger was effected by operation of the Luxembourg Law. 

The Substantive Issue

Was there a transfer under the SDO?

48.  The appellant lays much emphasis on the purported difference between a “transfer” (which was said to occur a result of voluntary acts of the parties involved) and “transmission” (which was said to take place by operation of law): §30 of the appellant’s Skeleton Argument.

49.  In my judgment, in the context of determining stamp duty under the SDO, any such difference, if any, is plainly irrelevant.

50.  In my view, what the court has to look at in this case solely concerns with one single matter and one matter only, namely, whether the Merger Proposal is a transfer within Head 2(3) of the First Schedule of the SDO. With respect to the appellant’s solicitor, the use of the word “transmission” by the appellant in the present context is merely a red herring.

What does “transfer” mean?

51.  Head 2(3) of the First Schedule to the SDO refers to “transfer” of Hong Kong stock.  “Transfer” is not defined under the SDO, but I agree with the respondent that its natural and ordinary meaning is “one parting with something to another”: See for example:-

(1)   an mode of disposing of or parting with an asset or an interest in an asset: Black’s Law Dictionary (10^th ed);

(2)   the document by which property is made over by one person to another: Jowitt’s Dictionary of English Law (4^th ed); and

(3)   conveyance of property (eg of stocks or shares) from one person to another: Shorter Oxford English Dictionary (6^th ed).

52.  In my view, the starting point of analysis must be the Merger Proposal itself, which expressly provided that on the effective date, all assets and liabilities of the Merging Sub-Fund including the HK Securities will be transferred to the Receiving Sub-Fund.  

53.  In this regard, I accept the respondent’s submission that the difference between “transfer” (by voluntary acts) or “transmission” (by operation of law), if any, and in other contexts (such as companies law or succession law), is wholly irrelevant to the present case which simply concerns whether the Merger Proposal is a transfer within Head 2(3) of the First Schedule of the SDO.

Change in beneficial ownership in the HK Securities

54.  The question of whether there was any passing or change of beneficial interest in the HK Securities is relevant to both limbs of Head 2(3) of the First Schedule of the SDO:-

(1)   For the first limb (ie a voluntary disposition inter vivos), there is an exception to stamp duty if no beneficial interest passes in the property conveyed or transferred: See s 27(5) of the SDO.

(2)   For the second limb, the instrument in question must effectuate a transaction whereby the beneficial interest in a Hong Kong stock passes otherwise than on a sale and purchase.

55.  Whilst framed as the appellant’s alternative argument, when contending that no beneficial interest in the HK Securities passed under the Merger Proposal, the appellant essentially relied on the same argument that the HK Securities passed under the Luxembourg Law, not the Merger Proposal: (See §48 of the appellant’s Skeleton Argument).

56.  Given the court’s rejection of the appellant’s primary submissions, in my view, the alternative argument must naturally fall away.

57.  Therefore, I make the following findings in this case:-

(1)   Prior to the Merger, the HK Securities were assets of the Merging Sub-Fund.

(2)   After the Merger, the Receiving Sub-Fund received all assets and liabilities of the Merging Sub-Fund, including the HK Securities which are held by a new custodian for the Receiving Sub-Fund as beneficial owner.

(3)   It was the Merger Proposal which implemented the Merger and, in turn, the transfer in beneficial interest in the HK Securities.

CONCLUSION

58.  In the aforestated premises, I would answer the 3 questions set out in the Case Stated as follows:-

(1)   Whether the Merger Proposal is chargeable with stamp duty: Yes

(2)   In particular, whether pursuant to the Merger Proposal, there was a change in beneficial ownership of the HK Securities: Yes

(3)   If the answer to (l) is yes, the amount of stamp duty chargeable: $627,216 (the quantum being not in dispute).

59.  I would therefore dismiss the appellant’s appeal with costs in favour of the respondent, such costs to be taxed if not agreed, with certificate for counsel.

60.  Lastly, I would like to thank the advocates on both sides for their helpful assistance.