TNAG-1949-FCO40-2777-Future-of-Hong-Kong-First-Pacific-Bank-Limited-1989 — Page 2

Mr. Stefan Gannon

17th August, 1989

are in the process of winding them up so that, hopefully, all of their assets will have been distributed to Far East Bank prior to the ordinance becoming effective.

The principal aims of the merger, as previously discussed with the Banking Commissioner, are that the two banks should be merged into one so that the capital and reserves of the merged bank should not be less than the aggregate capital and reserves of the two existing banks and So that one of the banking licences can be given up. In addition, the requirements of the First Pacific Group are that the merged bank should be called First Pacific Bank and should be entitled to the benefit of the existing accrued tax losses of First Pacific Bank which amount to approximately HK$190 million.

The other main requirement of both the First Pacific Group and the Banking Commissioner relates to timing. It is critical that in order for First Pacific Bank to obtain the benefit of current profits and losses of Far East Bank that the ordinance becomes effective by not later than 31st December, 1989. However, for other commercial reasons, the First Pacific Group would like the ordinance to become effective by not later 31st October.

With regard to the terms of the ordinance generally, I do not believe that it contains anything which could be considered to be new or controversial. The format is taken largely from previous merger ordinances and I believe that there is existing Hong Kong precedents for all of the provisions of the enclosed draft ordinance.

With regard to the method of merger effected pursuant to the ordinance, you will see that all of the undertaking, property and assets of Far East Bank is vested in and transferred to First Pacific Bank, save and except for its interest in the shares of First Pacific Bank. To the extent._ that, after the transfer of the undertaking, the capital of Far East Bank would no longer be represented by assets, the ordinance effects a reduction of the share premium account of Far East Bank SO that the issued share capital and the remaining share premium account is equal to a book value of the investment of Far East Bank in First Pacific Bank. The credit arising in the books of account of Far East Bank on such reduction of share premium account is applied in creating a special non-distributable reserve which is then transferred to and becomes a non-distributable reserve of First Pacific Bank.

As required by the Banking Commissioner, the banking licence of Far East Bank is revoked pursuant to the ordinance, and, since it will then no longer be a licenced bank, the ordinance also changes the name of Far East Bank so that it no longer includes the word "Bank"