By: Charlotte Tang
Early in 2013, the deal of the Apex Horizon All-Suite Hotel in Hong Kong gained attention and controversy because of its suspected adoption of a collective investment scheme. Ethical issues range from the design of publication materials to the closure of the deals. Amidst the criticism, Cheung Kong (Holdings) Limited called off the deal after about three months of investigation and discussion with the Securities and Futures Commission of Hong Kong. The company gave compensation packages to investors, most accepted. Nonetheless, there also are lawsuits against Cheung Kong demanding more comprehensive compensation, as well as forced deals. These are the details of the case of Cheung Kong and the Apex Horizon Hotel.
The Key Players
(i) Cheung Kong (Holdings) Limited
Cheung Kong is one of the largest conglomerates in Hong Kong. The company is involved in almost every area of business, from supermarkets to real estate. Apex Horizon All-Suite Hotel (hereafter, Apex Horizon) is a hotel operated by Cheung Kong’s wholly owned subsidiary, Pearl Wisdom Limited (PWL). The hotel locates in Lot No. 467, Kwai Chung, Hong Kong and started operating in 2009[i].
(ii) The Securities and Futures Commission (SFC)
The SFC is one of four financial regulators in Hong Kong. It is an independent salutary body that regulates the securities and futures markets in Hong Kong and has the authority to license intermediaries, authorize investment documents and financial products, supervise market operation and enforce financial regulations. Civil enforcements, usually fines, will be levied when regulations are violated[ii].
The financial instrument: Collective Investment Scheme (CIS)
A collective investment scheme refers to:
(i) The arrangement of properties that involve a pool of participants.
(ii) These participants have no “day-to-day control over the management of the property
(iii) The management pools contributions of participants and runs daily business on their behalf.
(iv) By acquiring this property, participants are entitled to profits or income from its operation[iii].
Common products in a collective investment scheme include mutual funds and unit trusts.
There are specific legal requirements of operating a CIS in Hong Kong[iv].
(i) Obtaining the authorization of the SFC
Under section 103 of the Securities and Futures Ordinance (SFO), authorization from the SFC is required before starting a CIS involving the general public in Hong Kong. Exceptions are that the scheme will be offered only to professional investors or parties out of Hong Kong, or that a prospectus is issued.
(ii) Provision of sufficient information
Under sections 104 and 105 of the SFO, the vendor must provide sufficient information, including key risks and features of the scheme, so that layman investors are “able to make an informed judgment.” The information should not be “false, biased or misleading.” Structural requirements, along with requirements on advertisements and publication materials involving the scheme, also are enforced. Authorization of the SFC is, again, required before the publication of the materials.
In late 2011, Cheung Kong was granted permission by the Lands Department to undergo condominium conversion (i.e. dividing the whole land lease into a number of shares, which can be sold to investors). The land lease of the Apex Horizon was split into 70,843 shares[v]. Simultaneously, shares were also distributed according to the size of the hotel units[vi].
On February 18 to 20, 2013, Cheung Kong offered 360 hotel units to the general public in three phases, in the form of “apartments.” Justin Chiu, executive director of Cheung Kong, announced that this offering was a good opportunity to buy an apartment without paying the residential stamp duty, which accounted for to up to 15 percent of the price of the deal[vii]. Residing in purchased hotel rooms and setting pricing was also said to be acceptable[viii]. However, Chiu later changed the rules, saying the units could not be used for residential purposes[ix]. In Cheung Kong’s terms, investors were “buying a hotel unit” that they could make money leasing, but would not have exclusive possession[x]. Investors also had no rights in the daily operations of the hotel. Moreover, Cheung Kong made it mandatory for investors to appoint a pre-assigned operator. Key functions, including room allocation and final decisions on pricing and leasing, would be executed by the operator. In exchange for these services, the investors would pay a management fee and utilities fee[xi].
On February 19 and 20, 2013, the Hong Kong government reminded the public about the risks of investing in the project[xii]. Specifically, the hotel units could not be used for residential purposes, based on the Hotel and Guesthouse Accommodation Ordinance. In case of failure to comply with the law, the hotel would be confiscated. Also, based on the land lease signed between the government and PWL, 21190m2 of gross floor area was required for hotel purposes[xiii].
Hotel units offered in February 2013 were all sold within the week[xiv]. Before that, Cheung Kong sold one hotel unit in December 2012[xv]. Provisional agreements for sale and purchase were signed in mid-February. Some investors complained about not being given enough time to study the contract before making a decision[xvi]. Moreover, instead of the conventional 14-day cooling-off period before signing the formal sales and purchase agreement, the deadline for signing the formal agreement was six days after that of the provisional agreement (i.e. February 26, 2013)[xvii]. In the agreement and disclaimer, it was written that the vendor and operator would not be held responsible for the failure to comply with the legal requirements. Some 19 rooms were also resold on the market[xviii].
On March 4 and 5, 2013, legislators filed the case with the Securities and Futures Commission (SFC), suspecting the case was a collective investment scheme (CIS), and urged further investigation[xxi]. The next day, the auction of a hotel unit was canceled due to legal issues[xxii].
A press release on the results of the formal investigation came out on May 13, 2013. The SFC confirmed that the case was a CIS and that participants in the deals should be provided with more information for an informed decision[xxiii]. Cheung Kong, however, claimed that investors could participate in the daily operations and did not agree that it was operating a CIS. Despite disagreeing with the conclusion, Cheung Kong agreed to unwind the deal conditionally. Given 10 days to consider accepting the cancellation, investors would be compensated with down payments, legal fees and interests[xxiv].
By May 30, 2013, most of the investors accepted the compensation and cancelled the contract. By June 20, 2013, four months after the sale, there were still investors who had not canceled the contract[xxv]. In July and August 2013, at least four investors and end buyers filed lawsuits against Cheung Kong, demanding a larger compensation or forced deals (i.e. forcing the seller to carry out the deal despite its attempt to cancel all deals) [xxvi].
Analysis on the Ethical Issues of the Case
1. Denial of running a CIS
It is evident that Cheung Kong was running a CIS, as it contained all essential elements of such a scheme. There was an arrangement of the hotel units (i.e. the properties) (condition (i) of a CIS) that investors could receive profits from leasing (condition (iv)). Also, investors had no rights over the daily operations of the properties, (condition (ii)) and an appointed manager pooled their contributions instead (condition (iii)).
Investors were allowed to set pricing for the hotel units, but the operator determined the final pricing[xxvii]. Investors could not be involved in other daily operations. Thus, Cheung Kong’s rationale that involvement in price setting equals rights over daily operations is fairly weak. When a CIS is not being operated, publication materials and advertisements are subject to fewer and looser regulations[xxviii]. Also, detailed information regarding the risks of the investment need not be disclosed. This may provide the motivation for Cheung Kong’s denial in running a CIS.
As a vendor, Cheung Kong has a responsibility to conduct its business ethically without exploiting loopholes by generalizations to remain exempt from regulations. Because it exploited this loophole, investors were not provided with all the information they were entitled to, thus resulting in an unfair deal in which not all necessary information was disclosed.
2. Providing false, unfair and incomplete information to investors
With its denial of running a CIS, Cheung Kong provided very limited information to investors, who were mostly from the general public. These investors were not professional investors and lacked specific knowledge of the CIS and the product. Cheung Kong merely provided them with floor plans, the area of the units and the pricing in prominent areas of the publication materials. The risks were printed in small fonts on the bottom of the back cover[xxix]. Besides, contradicting statements on using the hotel units for residential purposes and the right to manage daily operations were misleading to investors. This might have caused investors to make uninformed judgments and decisions.
Second, misrepresentation in ownership is also observed in the case. While the actual ownership could be more accurately described as shares, Cheung Kong misled the investors to believe they were buying a hotel unit[xxx]. This may not be completely inaccurate, but without rights over operational matters or exclusive possession, it may be more appropriate to say that investors were acquiring some shares of the hotel, which would earn them income.
As a vendor, Cheung Kong is obligated to provide true, fair and complete information to investors to facilitate their informed judgment. Instead of a brief display of the risks in an insignificant way, detailed investment risks should be disclosed in a more prominent way. Contradicting statements on the scheme should also be avoided to give investors a clear picture of the product. Lastly, accurate information regarding the financial product should be conveyed to the investors, instead of playing with words or using misrepresentation to push up sales.
3. Transferring most of the risks to investors
Apex Horizon was a very high-risk investment, with high ambiguity in legal and ownership issues. In light of this, Cheung Kong requested investors sign unfair disclaimers and agreements. It was declared that Cheung Kong would not bear any responsibility for the failure to obtain a hotel operation license. Second, it would not guarantee the right of investors to lease the hotel units as personal property. Third, the operator would have the exclusive right to permit and determine the priority on the use of the units. Besides, investors would need to pay the management and utilities fees in advance, with taxes payable solely contributed by the investors. Lastly, the contract with the operator could not be cancelled within 15 years[xxxi].
As a vendor, it is Cheung Kong’s responsibility to share the business risks with investors and make its best effort to lower the risks. However, the agreement terms proposed by Cheung Kong shifted most of the risks to the investors. In most cases, Cheung Kong would experience minimal risks, as the costs of running the hotel would be borne by the investors. With a management fee paid to Cheung Kong, its profits from the Apex Horizon would be guaranteed. However, the investors would need to bear various risks. Despite not possessing actual ownership of the hotel, they would be required to contribute taxes payable and utility fees. While taxes payable would be based on gross profit, there was no cap on the utility fees. Therefore, investors might need to bear all the operating costs. They would also be accountable for renovation procedures and costs.
Adding to the risk, income from leasing was not guaranteed. As the operator possessed the power of room allocation and other daily operations, the unit of any investor might not be leased for a long time, generating no income. Besides, there might be bad economic times during which the hotel would experience low occupancy rates.
Furthermore, the risk of having an incompetent operator, which lowers the leasing rate and the hotel’s income, cannot be overlooked. According to the contract, the operator would not be accountable for failure to obtain a new operating license, and the appointment contract could not be halted in 15-years’ time. Therefore, upon signing the contract, investors gave up their right to hold the operator liable, and it would difficult to request fair compensation in case of incompetency.
Hence, the contracts and disclaimers granted Cheung Kong and the operator more rights and power than they should have possessed, while reducing their obligations and risks to a very limited scope by shifting these to the investors.
4. Exerting pressure on investors for their decisions
In contrast to the convention of a 14-day cooling-off period between the provisional and formal sales and purchase agreements, Cheung Kong called for a six-day interval between the two. Also, investors were not given enough time to study the provisional agreement before signing. This was very unfair to the investors, as they might not have fully understood the risks they were bearing. The lack of time also deprived them of the opportunity to seek disambiguation and hence contributed to an uninformed decision.
As the vendor, Cheung Kong has an obligation to allow investors to make an informed decision free from pressure. Considering the complexity and riskiness of such an investment, it is reasonable to allow enough time for investors to understand and disambiguate the contracts and disclaimers. Investors should also be given the time and space to read through and understand the contracts before signing.
As the largest conglomerate in Hong Kong, Cheung Kong (Holdings) Limited launched a sale on all hotel units in the Apex Horizon All-Suite Hotel to the general public of Hong Kong in mid February 2013. Despite being very successful, a controversy on the ethics of the sale followed. Lawsuits and other filings have been recorded by the Securities and Futures Commission.
Four ethical issues may be observed in the case:
- Denial of running a collective investment scheme, despite all essential elements of the scheme being present
- Providing false, unfair and incomplete information to investors that hinder an informed judgment and decision
- Exerting pressure on investors by shortening the cooling-off period and available time for studying the contracts
- Transferring almost all risks to the investor, so Cheung Kong (Holdings) Limited bears fewer risks
These actions are intrinsically wrong compared to what a vendor is obligated to do. Cheung Kong should have admitted to running a collective investment scheme and complied with all legal requirements. The company also ought to provide true, fair and complete information to investors to allow an informed judgment, with a conventional cooling-off period and sufficient time and space to study the contracts. Lastly, the company is obligated to bear a fair amount of risks.
[i] Growth through Innovations – Annual Report 2007. Rep. Cheung Kong (Holdings) Limited, 2008. Web. 4 Oct. 2013.
Progressing with Solid Foundations – Annual Report 2008. Rep. Cheung Kong (Holdings) Limited, 2009. Web. 4 Oct. 2013.
[ii] “Our Role.” Our Role | Securities & Futures Commission of Hong Kong. The Securities and Futures Commission, n.d. Web. 4 Oct. 2013.
[iii] Hong Kong. Securities and Futures Commission. SFC Handbook for Unit Trusts and Mutual Funds, Investment Linked Assurance Schemes and Unlisted Structured Investment Products. Securities and Futures Commission of Hong Kong, Apr. 2013. Web. 4 Oct. 2013.;
Hong Kong. Legislative Council. Panel on Financial Affairs. Meeting on Friday, 5 July 2013. Legislative Council, Hong Kong, 14 Jun. 2013. Web. 4 Oct. 2013.
[iv] Hong Kong. Securities and Futures Commission. SFC Handbook for Unit Trusts and Mutual Funds, Investment Linked Assurance Schemes and Unlisted Structured Investment Products. Securities and Futures Commission of Hong Kong, Apr. 2013. Web. 4 Oct. 2013.
[v] “拆售酒店早部署-長和系申4酒店分契.”[Condominium of 4 hotels was in progress – Cheung Kong was preparing for the sale of the hotel units] The House News. The House News, 18 Jun. 2013. Web. 7 Sept. 2013.
[vi] Lam, Eddie. “雍澄軒業主的自問自答 [Question and Answer about Apex Horizon All-Suite Hotel by a Buyer].” 主場新聞 House News. The House News, 15 Mar. 2013. Web. 04 Oct. 2013.
Civic Party. 陳家洛就發展商分拆酒店房間出售事宜去信發展事務委員會 [Letter to the Panel of Development Regarding Issues of the Apex Horizon by Hon Prof. Kenneth Chan]. 公道自在人心 Civic Party. Civic Party, 19 Feb. 2013. Web. 4 Oct. 2013.
[viii] Yiu, Man-yi, Fung-yi Szeto, and Cheuk-ying Ng. “長實取消雍澄軒交易 [Cheung Kong Called off the Deals of Apex Horizon].” SCMP Chinese. South China Morning Post, 14 May 2013. Web. 04 Oct. 2013.
[ix] “雍澄軒合同 律師指9條款不合理 長實:八成買家已簽約 [Lawyers Found 9 Unfair Terms in the Contract; Cheung Kong: 80% of the Buyers Have Confirmed the Deal].” Property.mpfinance.com. Ming Pao, 26 Feb. 2013. Web. 04 Oct. 2013.
[x] Civic Party. Cheung Kong’s Recent Sale of The Apex Horizon Hotel Units to Individual Buyers. 公民黨- 公道自在民心 Civic Party. Civic Party, 20 Feb. 2013. Web. 04 Oct. 2013.
[xi] “雍澄軒合同 律師指9條款不合理 長實:八成買家已簽約 [Lawyers Found 9 Unfair Terms in the Contract; Cheung Kong: 80% of the Buyers Have Confirmed the Deal].”
“雍澄軒兩日沽清 政府盯死長實 [Apex Horizon Sold Out in 2 Days; Government Staying Alert].” Hk.apple.nextmedia.com. Apple Daily (Hong Kong), 20 Feb. 2013. Web. 04 Oct. 2013.
“陳茂波再籲市民 購買雍澄軒要小心考慮 [Secretary for Development Warns the Public Again: Careful Consideration Needed in Investing in Apex Horizon].” RTHK.hk. Radio Television Hong Kong, 20 Feb. 2013. Web. 04 Oct. 2013.
[xii] Hong Kong Government. Government Reminds Members of the Public to Note That Units in Apex Horizon Are for Hotel Use Only. Government Reminds Members of the Public to Note That Units in Apex Horizon Are for Hotel Use Only. Hong Kong Government, 19 Feb. 2013. Web. 04 Oct. 2013.
[xiii] Hong Kong Government. Government Reminds Members of the Public to Note That Units in Apex Horizon Are for Hotel Use Only. Government Reminds Members of the Public to Note That Units in Apex Horizon Are for Hotel Use Only. Hong Kong Government, 19 Feb. 2013. Web. 04 Oct. 2013.
[xiv]長實沽清雍澄軒-買家摩貨賺43萬 [Hotel Units Sold out at Apex Horizon All Suite Hotel; Buyers Profited HKD430K by Reselling the Unit]” 主場新聞 House News. The House News, 20 Feb. 2013. Web. 04 Oct. 2013.
[xv] “雍澄軒2011年獲批「分契」 [Apex Horizon Was Allowed to Undergo Condominium in 2011].” 星島日報網頁 Singtao.com. Sing Tao Daily, 21 Feb. 2013. Web. 04 Oct. 2013.
[xvi] Yiu, Man-yi, Fung-yi Szeto, and Cheuk-ying Ng. “長實取消雍澄軒交易 [Cheung Kong Called off the Deals of Apex Horizon].” SCMP Chinese. South China Morning Post, 14 May 2013. Web. 04 Oct. 2013.
[xvii] “雍澄軒合同被轟三不合理 買家報警求助 長實:可聯絡公司 [Unfair Contract Terms in Apex Horizon All-Suite Hotel; Buyers Seek Police Help; Cheung Kong (Holdings) Limited: Buyers Can Contact the Company].” 明報財經網 [Mingpao Finance]. Ming Pao, 25 Feb. 2013. Web. 04 Oct. 2013.
[xviii]“長實沽清雍澄軒-買家摩貨賺43萬 [Hotel Units Sold out at Apex Horizon All Suite Hotel; Buyers Profited HKD430K by Reselling the Unit].”
[xix] “雍澄軒合同被轟三不合理 買家報警求助 長實:可聯絡公司 [Unfair Contract Terms in Apex Horizon All-Suite Hotel; Buyers Seek Police Help; Cheung Kong (Holdings) Limited: Buyers Can Contact the Company].”
[xx] “雍澄軒合同 律師指9條款不合理 長實:八成買家已簽約 [Lawyers Found 9 Unfair Terms in the Contract; Cheung Kong: 80% of the Buyers Have Confirmed the Deal].”
[xxi] Civic Party. 郭家麒要求政府交代發展商分拆酒店房間出售事宜 [Hon Ka-ki Kwok Requested for Clarification from the Government on Issues Regarding Apex Horizon]. 公民黨- 公道自在民心 Civic Party. Civic Party, 19 Feb. 2013. Web. 04 Oct. 2013.
Civic Party. 陳家洛就發展商分拆酒店房間出售事宜去信發展事務委員會 [Letter to the Panel of Development Regarding Issues of the Apex Horizon by Hon Prof. Kenneth Chan].
[xxii] “雍澄軒房間拍賣臨場告吹 [Unexpected Halt to the Auction of Apex Horizon All-Suite Hotel Unit].” 雍澄軒房間拍賣臨場告吹 – 星島日報網頁 [Unexpected Halt to the Auction of Apex Horizon All-Suite Hotel Unit – Sing Tao Daily Website]. Sing Tao Daily, 6 Mar. 2013. Web. 04 Oct. 2013.
Wong, Olga, Yvonne Liu, and Paggle Leung. “Apex Horizon Hotel Room Buyer Fails to Auction off Suite.” South China Morning Post. South China Morning Post, 6 Mar. 2013. Web. 04 Oct. 2013.
[xxiii] Securities and Futures Commission of Hong Kong. Pearl Wisdom Limited Agrees with SFC to Unwind Sale of The Apex Horizon Hotel Units. Pearl Wisdom Limited Agrees with SFC to Unwind Sale of The Apex Horizon Hotel Units | Securities & Futures Commission of Hong Kong. Securities and Futures Commission of Hong Kong, 13 May 2013. Web. 04 Oct. 2013.
[xxiv] Hong Kong. Legislative Council. SFC’s Response to Hon Dennis Kwok and Hon Albert Ho’s Enquiries. Securities and Futures Commission of Hong Kong, 24 May 2013. Web. 4 Oct. 2013.
[xxv] “雍澄軒事件進度 證監會回應繼續監察 [SFC Will Continue to Monitor the Cancellation of Deals of Apex Horizon].” 大公資訊_大公網 Takungpao.com. Takung Pao, 20 June 2013. Web. 04 Oct. 2013.
[xxvi] “雍澄軒首爆摸貨訴訟 [First Lawsuit by End Buyers of the Apex Horizon All-Suite Hotel].” 雍澄軒首爆摸貨訴訟 – 東方日報 [First Lawsuit by End Buyers of the Apex Horizon All-Suite Hotel – Oriental Daily]. Oriental Daily, 14 July 2013. Web. 04 Oct. 2013.; Chiu, Austin, and Thomas Chan. “Buyers Sue Vendor over Apex Hotel Deals.” South China Morning Post. South China Morning Post, 14 Aug. 2013. Web. 04 Oct. 2013.
[xxvii] “雍澄軒合同 律師指9條款不合理 長實:八成買家已簽約 [Lawyers Found 9 Unfair Terms in the Contract; Cheung Kong: 80% of the Buyers Have Confirmed the Deal].”
[xxviii] Hong Kong. Securities and Futures Commission. SFC Handbook for Unit Trusts and Mutual Funds, Investment Linked Assurance Schemes and Unlisted Structured Investment Products.
[xxix] See the advertising material. “Your’s Dream House Consultant – HK Lux, KLN Lux. & Property Investments Blog 地產藏經閣.” The Apex Horizon 葵涌雍澄軒酒店. HK Lux, KLN Lux. & Property Investments Blog, 21 Feb. 2013. Web. 04 Oct. 2013. <http://gary82331333.blogspot.hk/2013/02/the-apex-horizon-33.html>.
[xxx] Civic Party. Cheung Kong’s Recent Sale of The Apex Horizon Hotel Units to Individual Buyers.
[xxxi] “雍澄軒合同 律師指9條款不合理 長實:八成買家已簽約 [Lawyers Found 9 Unfair Terms in the Contract; Cheung Kong: 80% of the Buyers Have Confirmed the Deal].”
Photo: Courtesy of www.scmp.com