Leung Chun-ying–UGL agreement

Leung Chun-ying at the Policy Address in 2013.

In October 2014, it was reported that Leung Chun-ying, Chief Executive of Hong Kong, had signed an agreement in 2011 with UGL Limited, an Australian engineering firm, in relation to its takeover of DTZ Holdings, a UK-listed real estate services company in which Leung was the director of the company. In agreement, UGL undertook to pay Leung £4 million (HK$50 million) in two instalments in 2012 and 2013 respectively, subject to specific conditions. As these payments concurred with the term of office of Leung Chun-ying as Chief Executive between 2012 and 2017, it has aroused concerns of the public and members in respect of the nature of payment, potential conflict of interests, relevant systems of declaration of interests and taxation implications.

Background

DTZ Holdings was a real estate services company listed in the United Kingdom with a history of more than 200 years before its closure. It had ventured into Asia since 1999, partnering with Asian firms including CY Lung & Co, a surveying company set up by Leung Chun-ying in Hong Kong. Leung was appointed as a board member of DTZ in December 2006 and chairman of DTZ Asia Pacific in February 2007.

DTZ was severely hit by the 2008 global financial crisis which resulted in a cumulative loss of £106.7 million (HK$1.3 billion) before tax during 2009-2011. As the major shareholder, Saint George Participations (SGP) refused to inject more liquidity into the company. As DTZ found it difficult to service the total secured debt of £110 million (HK$1.4 billion) owed to the Royal Bank of Scotland (RBS), its lead creditor, the latter engaged Ernst and Young (EY) to provide strategic advice on the options available to RBS in regard to DTZ's debt on 17 October 2011. As a result, DTZ commenced a fast-track sale two days later to minimise its debt loss. ON 8 November 2011, UGL Limited, an Australian engineering firm was chosen as the "preferred bidder" in the rescue takeover of DTZ as voted by the DTZ directors. Shortly after that, Leung stepped down from the board of DTZ on 24 November before he declared his candidacy for the 2012 Hong Kong Chief Executive election on 27 November 2011.

Agreement

On 2 November 2011, UGL issued an agreement letter to Leung, setting out the following terms of agreement in relation to UGL's takeover of DTZ:

1. Cash bonus earlier committed by DTZ: UGL undertook to pay Leung Chun-ying the outstanding bonus of £1.5 million (HK$18.7 million) which DTZ agreed to pay for the period from 1 May 2010 through to the completion of the sale of DTZ;
2. Formal terms of payment of £4 million: UGL would pay Leung Chun-ying a total of £4 million (HK$50 million) over a two-year period in 2012 and 2013, provided that Leung
   1. provides assistance in promoting UGL and DTZ as reasonably required by UGL, including but not limited to acting as a referee and adviser from time to time;
   2. supports the acquisition of DTZ by UGL;
   3. retains the senior management team of DTZ until end-2013;
   4. does not make any statements criticising the takeover; and
   5. undertakes non-compete, non-poach arrangements in the following 24 months after the acquisition of DTZ by UGL; and
3. Sale options of DTZ Japan Ltd: For the stake of DTZ Japan Ltd still held by Leung Chun-ying, UGL offered an immediate sale option to buy his shares at £200,000 (HK$2.5 million) plus 30% of the net profit of DTZ Japan Ltd after taxation for the three financial years during 2012-2013 if Leung chose to sell at a later date, UGL offered a put option to buy his stake within seven years from the completion of UGL's acquisition of DTZ, at a price equivalent to 30% times seven of the earnings before interest, taxes, depreciation and amortisation (EBITDA) of DTZ Japan Ltd, where EBITDA is the average of three financial years before he activates the put option, subject to a minimum payment of £200,000 (HK$2.5 million).

On the same day, Leung Chun-ying signed the agreement, but inserted a handwritten note "provided that such assistance does not create an conflict of interest" next to the clause (2)(1). At the same time, DTZ received a rival bid from another company, China's state-owned Tianjin Innovation Financial Investment Company which had made a bid that valued DTZ at £100 million more than the bid by UGL, but that this more valuable bid was rejected by the DTZ board, which included Leung, and not released to shareholders.. It was reported that EY and RBS thought the execution time was too long to address the imminent liquidity crisis, the directors decided to choose UGL as "it provided the most likely opportunity of delivering the best outcome for creditors". On 4 December 2011, UGL completed its acquisition of DTZ through the pre-pack sale mechanism, at a cost of £77.5 million (HK$967.2 million).

On 25 March 2012, Leung Chun-ying was elected as the Chief Executive of Hong Kong. He was sworn in on 1 July for a five-year period up to 30 June 2017. According to the terms of the agreement between Leung and UGL, Leung should have received £2 million (HK$25 million) each in 2012 and 2013 respectively from UGL, but there has not been any publicly available information on the details of these payments to date.

Disclosures and reporting

On 8 October 2014, Fairfax Media, an Australian media agency, published for the first time a detailed report on the above agreement between Leung Chun-ying and UGL on The Sydney Morning Herald and The Age. This had aroused intense public discussion in Hong Kong during the city-wide pro-democracy protests often dubbed as the "Umbrella Revolution". The members of the public raised question over the UGL agreement on the nature of payment, potential conflict of interests, relevant systems of declaration of interests; and taxation implications.

In an "additional commitment" clause, Leung agreed to "[act] as a referee and adviser from time to time" if UGL asked, raising questions about whether it was securing Leung's future services. However as Chief Executive he could not take up a paid advisory job for a commercial entity. Although Leung inserted a handwritten clause into the contract saying he would perform the required duty "provided that it does not create any conflict of interest", Democratic Party legislator Albert Ho said the clause "would not save Leung" because he had already pocketed the money. Ho also asked if Leung had declared it to the Chief Justice.

Leung Chun-ying issued a statement on the same day, highlighting that the £4 million (HK$50 million) payments arose from his "resignation from DTZ, not any future service to be provided by him". Moreover, as he had already resigned from the Executive Council (ExCo) well before his conclusion of agreement with UGL on the one hand, and the agreement took place before his election as the Chief Executive on the other, "there is no requirement under our current systems of declaration" to declare the payments. While the Neo Democrats, a pro-democracy party, lodged a complaint about the issue with the Independent Commission Against Corruption (ICAC) on 9 October 2014, the Secretary for Justice had delegated responsibility to Director of Public Prosecutions to handle the case.

Responding to a query about whether tax was paid on the money Leung received from UGL, a spokesman for the Chief Executive said that he was advised by an accountant that he "was not required to pay salaries tax for the related payments." John Garnaut, an Australian journalist who co-wrote the original report, said his team received documents on 5 October from an anonymous source. Garnaut said Leung's lawyers had "threatened" legal action before the report was published. The Chief Executive's office said Leung decided to persue a potential case because the reporters' allegations of a "bribe" were "very serious".

Both EY and the chairman of the then DTZ Tim Melville-Ross were reportedly not aware of the agreement between Leung and UGL in 2011. In reply to a press enquiry, EY commented that "it was natural" for UGL to enter into a non-poaching arrangement to secure key personnel, and added that "any such arrangements made were between UGL and the employees". Likewise, RBS was reportedly unaware of the agreement. That said, there was a conflicting press report claiming the otherwise afterwards. UGL issued a press release on 9 October 2014 to counter the allegation of "secret payment" to Leung. It said that the agreements were "common confidential commercial arrangements when a business is being acquired" and they were "standard businesses practice for non-compete and non-poach agreements".

David Webb, a deputy chairman of the Takeovers and Mergers Panel under the Securities and Futures Commission and editor of Webb-Site.com, said Ernst and Young should have been informed so it could "consider whether an excessive amount of the value of the business was being shifted from the company to its director and management". By failing to disclose the side-deal between himself and UGL, Webb said Leung may have "obtained an advantage without his principal’s consent, against Section 9 of the Prevention of Bribery Ordinance."

Legislative Council responses

On 17 October 2014 at the House Committee meeting of the Legislative Council, three members put forward a proposal for the House Committee Chairman to move a motion under the Legislative Council (Powers and Privileges) Ordinance (Cap. 382) in Council to seek the Council's authorisation for the appointment of a select committee to inquire into the alleged receipt of secret payments of Leung from UGL and related issues. After deliberations, the proposal was voted down by the pro-Beijing camp as 22 members voted for and 38 members voted against the proposal. Similar proposals were tabled on several occasions on 31 October, 5 November and 20 November but all motions were defeated by the pro-Beijing camp.

At the council meeting of 2 November 2016, the petition presented by Kenneth Leung of the Professional Commons co-signed with Andrew Wan of the Democratic Party to establish a select committee to inquire into the UGL incident. However, it was not authorised by the council to exercise the powers under section 9(1) of the Legislative Council (Powers and Privileges) Ordinance (Cap. 382).

Rebecca Li incident

On 7 July 2016, Rebecca LI Bo-lan, the acting head of the Operations Department of ICAC since 18 July 2015, resigned after the cessation of the acting appointment in which such unusual change raised public concern. It was speculated in some media reports that cessation of acting appointment might be related to the controversy surrounding the UGL Incident, as Li was reportedly the principal investigator over the UGL case in ICAC. Leung Chun-ying said he had no hand in Li's demotion. ICAC Commissioner Simon Peh, who was appointed by Leung Chun-ying, insisted he alone made the personal judgment that Rebecca was not up to the job.

In late July, Ricky Yau Shu-chun, who replaced Li as the acting head of the Operations Department, reportedly requested to terminate his contract with the ICAC in a few weeks after Li's resignation, and he would proceed on final leave on 1 August. Chief Forensic Accountant Tang Shuk-nei was also reported to be leaving the agency after her contract ends in mid August. Anson Chan, the former Chief Secretary for Administration and convener of think tank Hong Kong 2020, expressed concern over the unusual shakeup and urged Simon Peh to publicly explain in detail. In a surprise turn of events, Ricky Yau withdrew his request to terminate his contract only about three hours after his departure was made public.

The UGL case has now been investigated by the ICAC for almost three years without any conclusion.

Leung Chun-ying's legal letter to Apple Daily

In September 2016, Leung Chun-ying issued a legal letter to Apple Daily, a local pro-democracy newspaper, over an editorial it published on 8 September in relations to the UGL allegations. It wrote in the letter that the newspaper's "malicious" allegations of bribery and "vicious intention" harm his chances of re-election. The editorial in question called on newly elected legislators to invoke the Legislative Council (Powers and Privileges) Ordinance to pursue Leung over the controversial payment of HK$50 million he ­received from UGL. "The usage of the false corruption allegation to prevent Mr C.Y. Leung from exercising his constitutional right to stand for the ­re-election ... if he chooses to, demonstrates the very serious kind of malicious and injurious motive," the letter wrote. It was the second time Leung had threatened legal action against a local media outlet. In 2013, Leung issued legal letters to the Hong Kong Economic Journal and columnist Joseph Lian Yi-zheng over an article linking him to triad gangsters.

The letter also objected to the paper’s “disdainful” use of nicknames for Leung such as "689", "Wolf Ying" and "Liar Ying" in a campaign against his leadership, in which "689" refers to the number of votes Leung received from the 1,200-strong Election Committee in 2012. Apple Daily chief editor Chan Pui-man dismissed Leung’s complaint that the editorial could make him un-electable as "ridiculous and laughable". The Hong Kong Journalists Association expressed "shock and regret" over Leung’s legal action, saying he was causing public concern over freedom of speech.

Leung Chun-ying suing Kenneth Leung

In March 2017, Leung Chun-ying sued member of the Legislative Council Kenneth Leung for ­defamation over remarks about the UGL payment, claiming the latter had no basis to allege at a press briefing that overseas tax authorities were investigating the Chief Executive in relation to the HK$50 million payment from UGL. This was the first time a Hong Kong Chief Executive had sued a legislator for defamation. The writ also said it was defamatory for Kenneth Leung to claim the "central authorities would be very embarrassed if anything should happen to" Leung Chun-ying if he was elevated to vice-chairman of the Chinese People’s Political Consultative Conference in which he assumed the office soon after.

Kenneth Leung said the lawsuit would not stop him from continuing with the ­Legislative Council investigation into the payment controversy in which he was a member of the select committee. According to the website of London-based law firm Clifford Chance, for which the legislator works, Kenneth Leung specialises in corporate and international tax planning and is named as one of the Global Top 250 tax advisers in the Tax Directors Handbook.

Holden Chow controversy

In May 2017, Holden Chow, member of the Legislative Council of the pro-Beijing Democratic Alliance for the Betterment and Progress of Hong Kong (DAB) and vice-chairman of the Legislative Council select committee to inquiry over the UGL incident was reportedly privately discussed with Leung Chun-ying about the UGL case in which Leung "made suggestions about the scope" of the investigation. The behind-the-scene discussion between Leung and Chow was condemned by the pro-democracy camp in which some reported to the ICAC. Chow apologised for his "lack of political sensitivity" in not informing the select committee of Leung's "personal input", but he insisted there was nothing wrong in discussing the matter with Leung in private.

Pro-democrats demanded that Chow resign from the select committee and from the Legislative Council as he had lost credibility. Leung Chun-ying called for an inquiry to find out who leaked the confidential document revealing his input in the matter during a closed-door meeting. He also accused Kenneth Leung, member of the select committee whom he was suing for allegedly defaming him over the UGL controversy, of being prejudiced against him. He demanded Kenneth Leung to withdraw from the investigation for holding conflicting interests.

External links

• The UGL Incident, Research Office, Legislative Council Secretariat
• Richard Leupen's letter to CY Leung