WHAT IS A "SHADOW COMPANY"?
A shadow company is a limited company registered in Hong Kong which adopts a well known brand name or trade mark as part of its name. These companies will conduct their business in China thereby misleading the consumers in the Mainland.
Unlike the Companies Registry in Hong Kong, business registration in China will only be granted after a stringent process of scrutiny. The Chinese authorities believe that companies registered in Hong Kong will be subject to the same requirements and thus treat the Certificate of Incorporation issued by the Companies Registry in Hong Kong as the licence or authority to sale, deal, produce, manufacture or distributed the infringed products. As a result, they are reluctant to take action against any trade mark infringers in China who are properly registered in Hong Kong.
Under the old Companies Ordinance, Hong Kong too had a vetting procedure of the name of the proposed new companies. However, to maintain Hong Kong's competitive edge and to speed up the registration process, it was considered that the old region was no longer advisable. This enables the infringers of intellectual property rights to explore this legal lop hole to produce, manufacture, distribute products bearing the infringed trade names and marks in China.
To address this problem, the Registrar of Companies can take actions and measures, in appropriate cases, under Section 22 of the Companies Ordinance. The Registrar of Companies may (within 12 months of registration of the objectionable company name) direct that the company to change its name, where it is the same as or too similar to, the name of another company whose name appear or should have appeared on the Registrar's index of company names of which is incorporated or established under any Ordinance at the time of the registration.
Where a company fails to comply with the Registrar's direction to change name, the Registrar can take the following actions :-
(a) Taking prosecution action against the company and/or its officers. The maximum penalty for failure to comply is HK$100,000 and imprisonment of 6 months as well as daily default fine of HK$700.
(b) Replacing the company name with the company registration number.
(c) Posting the List of Companies in Default on the "Statistics-Non Compliance with Directions to Change Name/Replacement of Company Name by Company Registration Name" in the Companies Registry's website, so as to alert the general public and identity these companies.
Section 291 of the Companies Ordinance also provides the Registrar with power to strike off from the register a company which he has reasonable cause to believe that it is not carrying on business or in operation. However, the Companies Registry adopts a very narrow interpretation of these sections.
In Hong Kong intellectual property rights can also be protected by legal proceedings, so long as the plaintiff can demonstrate that it has a reputation and it has been misappropriated by the defendant. The fact that a shadow company has not commenced making or selling their products in Hong Kong does not mean it has not made use of the trade marks of the plaintiff.
It is highly advisable for those engaging in China trade to be extra vigilant and should take speedy legal action against the infringers.
Albert Lam
Partner of
Hampton, Winter And Glynn
20 February 2009
Revised on September 2011