Out of the shadows

Shadow companies – companies that adopt a well-known brand name as part of their name upon incorporation – have been a serious problem in Hong Kong for many brand owners.

Typically, the directors and shareholders of such companies give false addresses for themselves and for the company, then use the shadow company vehicle to imply an association with a well-known brand to give legitimacy to infringing activities in China or elsewhere in South East Asia. They usually do this by ‘licensing’ the company names to manufacturers located in China or elsewhere in South East Asia, who then produce infringing products and label such products as having been made by or with the authorisation of the shadow company. The problem has escalated in recent years, with some brand owners facing scores of such shadow companies incorporated in Hong Kong.

The problem

Under Hong Kong law, there is no requirement for company names to be screened for potential trademark infringement prior to incorporation. The Companies Registrar has the power under section 22 of the Companies Ordinance to direct a company to change its name within 12 months of registration if, in his opinion, the proposed company name is “too like” a name that is already registered. It is up to an aggrieved brand owner to raise this within the 12-month period.

In practice, not many complaints lodged under section 22 of the Companies Ordinance are successful as the mere addition of one or two words around the hijacked brand is enough to persuade the Registrar that the two names are not that similar. According to statistics issued by the Companies Registry, 719 complaints were lodged between 2000 and 30 June 2007 under section 22 of the Companies Ordinance. The Companies Registry issued 145 directions for the relevant companies to change their names, but only 79 of such directions were complied with.

Since most of shadow companies have no operations in Hong Kong, could they be de-registered on the basis that they are defunct? In theory, this is possible; in practice, this is difficult to achieve. Brand owners can apply under section 291 of the Companies Ordinance to strike off a shadow company from the register on the basis that it is defunct. Such applications take at least a year and the mere filing of an annual return can be sufficient evidence to defeat an application under section 291. Evidence of business being carried out in China or other South East Asian countries, including evidence of business that under Hong Kong IP laws would amount to infringing activities, may also be sufficient to persuade the Registrar that the shadow company is not defunct.

In such circumstances, brand owners are left with no option but to take trademark infringement and/or passing-off actions against shadow companies. Many brand owners have done just that. Such actions are invariably uncontested and default judgments are obtained quite easily and at relatively little cost. Up until early last year, these victories remained Pyrrhic victories, as orders to change a company name obtained against the shadow companies only are, in practice, useless. A change of the name of a company requires a special resolution by the shareholders of the company. Without such a resolution the Companies Registry cannot effect the change of name ordered by the courts of Hong Kong.

This, so far, has been the impasse faced by many companies that have obtained court orders requiring the change of name of shadow companies, only to find that such orders could not be enforced.

Light at the end of the tunnel

Orders granted in the High Court of Hong Kong in January 2007 to Anheuser-Busch Inc may offer an interim solution to the problem. In nine actions brought in the High Court of Hong Kong, Anheuser-Busch joined the directors and shareholders of nine shadow companies as co-defendants to the actions (as being the individuals who incorporated the companies, created the instruments of deception and designed the shadow company names). Anheuser-Busch obtained orders against the defendants requiring them to change the name of each of the shadow companies incorporated by them, in addition to orders rendering void any letters of authorisation issued by such shadow companies.

Upon the authority of English Court of Appeal case Halifax plc and others v Halifax Repossessions Ltd & ors (2004) EWCA Civ 331, Anheuser-Busch also obtained orders that granted powers to their solicitors Lovells to sign special resolutions on behalf of the respective shareholders and directors of the nine shadow companies in the event that the defendants failed to comply with the orders to change the names of the shadow companies within a prescribed period of time. The Companies Registry accepted these special resolutions and considered them to have the same legal effect as the passing of a special resolution by the shareholders of the defendant company in a general meeting and issued the new Certificates of Change of Name.

There are a few points worth noting when adopting this approach. On 28 August 2007, the High Court dismissed the appeal launched by Hitachi Ltd in the case of HCA 2520/2006 Hitachi Ltd v Hticahi Wei Chu (Hong Kong) Limited and refused to grant an order for the plaintiff’s solicitors to change the name of the defendant company. The difficulty faced by the court in Hitachi was that the shareholders of the defendant company were not sued and therefore no order against them had been obtained compelling them to pass a special resolution to change the name of the company. The court could not give authority to a person to change the name of the defendant in a manner that did not comply with Section 22 of the Companies Ordinance.

The second concern expressed by the court related to the choice of new name. The court needs to be assured that no offending or demeaning names would be used to prejudice the defendants. We suggest that in such circumstances brand owners should explain to the court that the new name would be the existing company name of the defendant company minus the plaintiff’s brand. The defendants could hardly object to a name already chosen by them, minus the plaintiff’s trademark or variation thereof, which the court will have already decided they should be prohibited from using.

Recent proposals

There is a consensus in the IP community in Hong Kong that changes to the Companies Ordinance should be made to deal with the shadow companies problem. One proposed amendment is to allow the Companies Registry to strike off shadow companies from the register if they do not comply with court orders requesting their change of name before a stipulated deadline. Another proposal is to set up a company name adjudication system akin to the online dispute resolution system for domain names. Amendments to the Companies Ordinance are expected in the future, but not before 2010.

Meanwhile, the Companies Registry has taken active steps and, together with IP practitioners, in Hong Kong has set up a committee to deal with the issues of shadow companies within the statutory constraints of the Companies Ordinance. A number of interim administrative measures have already been adopted. Such measures include publishing a list of shadow companies that have failed to comply with directions issued by the Companies Registrar to change their name and including a health warning on the certificates of newly incorporated companies, making it clear that a company name does not confer any trademark rights or other IP rights to the company.

These are small steps at present but ones that it is hoped will help brand owners with their enforcement actions in China or elsewhere in South East Asia, where shadow companies usually engage in infringing activities.

Gabriela Kennedy is a partner in the IPMT group at Lovells, Hong Kong. She and her team acted for Anheuser-Busch Inc in the cases discussed in this article.