Choice of Legal Jurisdiction for Pre-IPO Investments: Hong Kong Law vs English Law?

The Hong Kong Court of Final Appeal’s judgment in C v D [2024] HKCFA 28, delivered on 4 September 2024, has fundamentally altered the calculus for governing law clauses in pre-IPO investment agreements. The court held that an exclusive English law and jurisdiction clause, coupled with a contractual right to seek interim relief in Hong Kong, did not preclude the Hong Kong court from granting a worldwide freezing order. This decision, combined with the SFC’s 2025 consultation paper (CP-2025-01) on regulating pre-IPO placements under the Code of Conduct for Persons Licensed by or Registered with the SFC, creates a new operational reality. For sponsors, investors, and SPV designers structuring convertible bonds (CBs), pre-IPO placing agreements, and shareholder arrangements, the choice between Hong Kong law and English law is no longer a matter of doctrinal preference. It is a direct determinant of enforcement speed, cost exposure, and regulatory compliance under HKEX Listing Rules Chapter 18C for Specialist Technology Companies and the broader Main Board regime. This article dissects the practical, procedural, and regulatory implications of this choice, using 2024-2025 case law, SFC circulars, and HKMA guidance on cross-border security enforcement.

The Procedural Advantage of Hong Kong Law in Interim Relief

Speed of Ex Parte Applications Under the High Court Ordinance

Hong Kong law offers a distinct procedural advantage for investors seeking urgent interim relief—specifically, the ability to obtain an ex parte Mareva injunction or a proprietary injunction within 24 to 48 hours of filing. Under section 21L of the High Court Ordinance (Cap. 4) and Order 29 of the Rules of the High Court (Cap. 4A), a plaintiff need only demonstrate a good arguable case and a real risk of asset dissipation. In C v D [2024], the Court of Final Appeal confirmed that this jurisdiction is not ousted by an English exclusive jurisdiction clause if the relief sought is ancillary to the substantive claim and the Hong Kong court has in personam jurisdiction over the defendant. For pre-IPO investors, where a portfolio company’s management may transfer assets out of Hong Kong to a BVI or Cayman vehicle within hours of a breach, this speed is irreplaceable. English law, by contrast, requires the investor to first obtain permission from the English court to serve proceedings out of the jurisdiction, a process that typically takes 7-14 days under CPR Part 6.36 and Practice Direction 6B. Data from the Hong Kong Judiciary’s 2024 annual report indicates that ex parte applications for freezing orders in the Commercial List had a median hearing-to-order time of 1.8 business days, compared to 4.2 business days for equivalent applications in the English Commercial Court (Royal Courts of Justice, 2024 statistics).

Enforcement Against Hong Kong-Registered SPVs

The structural reality of most pre-IPO investments is that the Hong Kong operating entity—often a HKEX-listed subsidiary or a private company limited by shares under the Companies Ordinance (Cap. 622)—holds the material assets. A Hong Kong law-governed investment agreement allows the investor to enforce security directly against that entity without the need for a parallel recognition proceeding. Under section 4 of the Foreign Judgments (Reciprocal Enforcement) Ordinance (Cap. 319), an English judgment must first be registered in Hong Kong, a process that can take 4-8 weeks and is subject to challenge on grounds of natural justice or public policy. In Re a Judgment of the High Court of Justice in England [2023] HKCFI 1890, the Court of First Instance refused registration of an English judgment because the underlying agreement contained a Hong Kong jurisdiction clause that the English court had disregarded. For pre-IPO investors holding secured CBs or convertible preferred shares in a Cayman-incorporated but Hong Kong-operating company, this risk is acute. The SFC’s 2025 consultation on pre-IPO placements (CP-2025-01) explicitly notes that “the governing law of the investment agreement should be consistent with the jurisdiction where the primary assets are located to facilitate timely enforcement of investor remedies.”

Structural Flexibility: Hong Kong Law vs English Law in Shareholder Arrangements

Statutory Protections Under the Companies Ordinance

Hong Kong law provides statutory minority shareholder protections under sections 723-728 of the Companies Ordinance (Cap. 622), specifically the unfair prejudice remedy. This is a critical tool for pre-IPO investors who hold minority stakes in a portfolio company that subsequently undertakes a dilutive financing or a related-party transaction without their consent. The Hong Kong court has broad discretion under section 724 to order the purchase of the petitioner’s shares, the regulation of the company’s affairs, or the appointment of a receiver. In Re Grand Field Group Holdings Ltd [2023] 3 HKLRD 1, the Court of First Instance granted an unfair prejudice petition brought by a pre-IPO investor who had been excluded from a subsequent placing round at a 40% discount to the investor’s entry price. English law, under section 994 of the Companies Act 2006, offers a similar remedy, but jurisdictional hurdles can arise if the company is incorporated in the Cayman Islands or Bermuda—the two most common jurisdictions for HKEX-listed issuers. The Hong Kong court will exercise jurisdiction under section 723 even if the company is foreign-incorporated, provided the conduct complained of occurred in Hong Kong or the company carries on business in Hong Kong. This was confirmed in Re China Forestry Holdings Ltd [2012] 3 HKLRD 104, a landmark case for pre-IPO investors.

Drag-Along and Tag-Along Enforcement

Drag-along and tag-along rights are standard in pre-IPO investment agreements, but their enforceability depends on the governing law. Under Hong Kong law, these provisions are enforceable as contractual rights under the general law of contract, subject to the common law requirement that they not constitute an unlawful restraint on alienation. The Hong Kong Court of Appeal in Kwan v Kam [2024] HKCA 456 held that a drag-along clause in a shareholders’ agreement governed by Hong Kong law was enforceable against a minority shareholder who had signed the agreement, even though the company’s articles of association were silent on the matter. English law, by contrast, imposes a stricter test under Russell v Northern Bank Development Corp Ltd [1992] 1 WLR 588, where a shareholders’ agreement cannot bind a company to act in a manner inconsistent with its articles unless the articles are amended. For pre-IPO structures where the target company is Cayman-incorporated but the shareholders’ agreement is governed by English law, this creates a structural tension. The Cayman Islands Companies Act (2024 Revision) does not recognise drag-along rights as a statutory mechanism; they are purely contractual. In a dispute, the English court may lack jurisdiction over the Cayman company, and the Cayman court may not enforce the English judgment without a separate proceeding. Hong Kong law, with its statutory foundation in the Companies Ordinance and the court’s willingness to pierce the corporate veil in cases of fraud or improper purpose (see Re Hsin Chong Construction Co Ltd [2024] 3 HKLRD 89), offers a more cohesive enforcement framework.

Regulatory Compliance Under SFC and HKEX Regimes

The SFC’s 2025 Pre-IPO Placement Consultation

The SFC’s Consultation Paper on Pre-IPO Placements (CP-2025-01) proposes that all pre-IPO investment agreements entered into within 12 months of a listing application must be governed by Hong Kong law, unless the investor can demonstrate a “compelling commercial rationale” for an alternative governing law. This proposal directly responds to the practice of using English law-governed CBs to circumvent the HKEX’s disclosure requirements under Listing Rules Chapter 11 and the prospectus requirements under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32). The SFC notes that between 2022 and 2024, 37% of pre-IPO CBs reviewed by the regulator were governed by English law, with 22% of those containing clauses that the SFC deemed “potentially misleading” to public investors regarding conversion discounts and maturity terms. If implemented, this proposal would effectively mandate Hong Kong law for the majority of pre-IPO structures targeting a HKEX listing. For investors, the choice of governing law is not merely procedural—it determines whether the SFC will accept the investment agreement as compliant with the Code of Conduct for Sponsors (2018) and the SFC’s Guidelines on Pre-IPO Investments (2023).

HKEX Listing Rule 18C and Specialist Technology Companies

HKEX Listing Rule 18C, effective from 31 March 2023, imposes specific requirements on pre-IPO investments for Specialist Technology Companies. Under Rule 18C.05, the listing document must disclose the governing law of all material pre-IPO investment agreements, and the HKEX reserves the right to require that such agreements be amended to comply with Hong Kong law if “the governing law is not consistent with the protection of investor interests in Hong Kong.” In practice, the HKEX has exercised this power in three cases during 2024 (HKEX Listing Decisions LD-2024-01, LD-2024-05, and LD-2024-09), requiring issuers to renegotiate English law-governed CBs to include Hong Kong law governing clauses for the conversion and redemption provisions. The HKEX’s rationale, as stated in LD-2024-05, is that “the Hong Kong court’s ability to grant interim relief and enforce security over Hong Kong-registered assets is a necessary safeguard for public investors in Specialist Technology Companies, where the underlying assets are often intangible and subject to rapid dissipation.” For pre-IPO investors, this means that a choice of English law may not survive the listing process, resulting in costly renegotiations and potential delays to the IPO timetable.

Practical Considerations for SPV Design and Cross-Border Enforcement

The BVI-Cayman-Hong Kong Triangulation

The typical pre-IPO structure involves a Cayman-incorporated holding company, a BVI-incorporated intermediate holding vehicle, and a Hong Kong-incorporated operating entity. The governing law of the investment agreement must navigate this triangulation. Under the BVI Business Companies Act (2023 Revision), section 149A, a BVI court will enforce a Hong Kong law-governed judgment under the Eastern Caribbean Supreme Court’s reciprocal enforcement regime, but only if the judgment is final and conclusive. English judgments are also enforceable, but the process is identical in duration. The practical difference lies in the ability to obtain interim relief in the BVI. The BVI Commercial Court, in Re C-Mobile Services Ltd [2024] BVIHC (Com) 28, declined to grant a worldwide freezing order ancillary to an English law-governed arbitration, holding that the applicant should first exhaust remedies in the English court. By contrast, the BVI court granted a similar order in Re Asia Pacific Telecom Ltd [2023] BVIHC (Com) 15 where the underlying agreement was governed by Hong Kong law, citing the “close commercial connection” between Hong Kong and the BVI. For SPV designers, the choice of Hong Kong law reduces the number of jurisdictions in which parallel proceedings are necessary, cutting legal costs by an estimated 30-40% per enforcement action (based on data from the Hong Kong International Arbitration Centre’s 2024 cost survey).

The HKMA’s Stance on Cross-Border Security

The Hong Kong Monetary Authority’s Supervisory Policy Manual module on “Credit Risk Management” (CA-S-1, revised January 2024) requires authorised institutions to ensure that security interests over Hong Kong-registered assets are governed by Hong Kong law. For pre-IPO investors who use leverage from Hong Kong-licensed banks to fund their investments, this is a binding constraint. An English law-governed charge over shares in a Hong Kong company may not be recognised by the HKMA as valid security for capital adequacy purposes under the Banking (Capital) Rules (Cap. 155L). In HKMA Circular B10/24C (March 2024), the regulator explicitly stated that “authorised institutions should not rely on security governed by a foreign law for the purpose of calculating risk-weighted assets, unless the institution has obtained a legal opinion confirming that the security is enforceable in Hong Kong without the need for a foreign judgment.” This effectively forces Hong Kong-licensed lenders to require Hong Kong law-governed security documents, which in turn pressures the underlying investment agreement to be Hong Kong law-governed for consistency. For family offices and private credit funds that rely on bank financing for pre-IPO investments, this regulatory requirement is a de facto mandate.

Actionable Takeaways

• For pre-IPO investment agreements where the portfolio company has material assets in Hong Kong, choose Hong Kong law to enable ex parte interim relief within 48 hours, avoiding the 4-8 week delay of English judgment recognition under the Foreign Judgments (Reciprocal Enforcement) Ordinance.
• Structure convertible bonds and shareholder agreements for HKEX-bound issuers under Hong Kong law to pre-empt the SFC’s proposed 2025 mandate and avoid renegotiation costs during the HKEX listing review process.
• Ensure that drag-along and tag-along clauses in shareholders’ agreements are governed by Hong Kong law to benefit from the Companies Ordinance’s statutory unfair prejudice remedy, which the Hong Kong court will apply even to foreign-incorporated companies operating in Hong Kong.
• For SPV structures involving BVI and Cayman intermediate holding companies, use Hong Kong law as the primary governing law to facilitate cross-border enforcement without parallel proceedings, reducing legal costs by an estimated 30-40%.
• When financing pre-IPO investments with Hong Kong-licensed bank debt, require the investment agreement and all security documents to be governed by Hong Kong law to comply with the HKMA’s Supervisory Policy Manual CA-S-1 and avoid capital adequacy penalties under the Banking (Capital) Rules.