Mr. Stefan Gannon
17th August, 1989
With regard to the question of the accrued tax losses, since there is no change in First Pacific Bank, then it simply retains the benefit of all its existing accrued tax losses. However, it would not appear to be possible, within the scope of existing Hong Kong merger ordinance precedents, to transfer the benefit of the accrued tax losses in Far East Bank. However, the amount of the accrued tax losses within Far East Bank is relatively minor and will be retained by Far East Bank and can be utilised by way of set off against future profits of Far East Bank. However, we will speak direct to the Commissioner of Inland Revenue with regard to this.
With regard to the capital of the merged bank, you should note two adjustments which are referred to in the proforma balance sheet and in the ordinance. First, an adjustment which will be effected prior to the ordinance becoming effective whereby all properties of First Pacific Bank will be taken into the books of account of the bank at 70% of the recent independent valuation of such properties at 31st March, 1989, this being in accordance with the current guidelines laid down by the Banking Commissioner. All of the properties of Far East Bank were also independently valued as at 31st March, a copy of both valuation reports being set out in the enclosed First Pacific Bancshares rights issue circular. You will see that under the ordinance, I have provided that, for the purposes of the accounting treatment of the merger, in the books of account of First Pacific Bank the properties of Far East Bank shall be deemed to have been acquired as at the appointed day at the valuation figure so that 100% of the value of those properties is recognised in the books of account.
With regard to
to the question of extraterritoriality which you raised in our discussions, I confirm that Far East Bank does not have any assets or business outside Hong Kong and therefore, the problem does not arise. However, the position is dealt with by section 5(2) of the ordinance from which you will see that if there is in fact any asset or business outside Hong Kong, the ordinance does not attempt to transfer the legal ownership of such asset but states that the Far East Bank will hold it on trust for First Pacific Bank pending the taking of any necessary steps in the relevant jurisdiction.
The other remaining point which I feel should be drawn specifically to your attention is the question of stamp duty arising on the transfer of shares in the various subsidiaries of Far East Bank to First Pacific Bank. As stated above, the net asset value of the principal subsidiary, FPB Asia Limited, is in the region of HK$90 million and, accordingly, stamp duty on that transfer will be substantial and we wish to avoid that stamp duty if at all possible.