Stop the .HK Takeover
19 August 2008

If you were a turkey in a democracy, would you vote for Christmas? That's what the Hong Kong Government is hoping members of Hong Kong Internet Registration Corporation Ltd (HKIRC) will do at an Extraordinary General Meeting at 9 a.m. this coming Saturday, 23-Aug-08, by voting to reduce their representation on the HKIRC board of directors, and hand control of it to the Government. If you are an HKIRC member, this is your first and last wake-up call - you must attend the meeting on Saturday, and vote against. Further details of the EGM below.

What is HKIRC?

HKIRC was incorporated on 14-Dec-01 to operate the registry for all domains ending in ".HK", Hong Kong's "country code top-level domain" or ccTLD, assigned by the global Internet Assigned Numbers Authority (IANA). It is a "company limited by guarantee" which means it has members, but not shares. It is not-for-profit. Most of its operations are carried out by a wholly-owned subsidiary, Hong Kong Domain Name Registration Co Ltd (HKDNR), which it acquired from the Joint Universities Computer Centre Limited (JUCC) in Mar-02. JUCC was the original operator of the .HK domain before you ever heard of the web.

Under its Memorandum and Articles of Association (M&A), HKIRC has 6 classes of membership. Each member has one vote in members' meetings. The classes, and the current number of members (based on the list of members we have compiled from the web site), are:

The reason for the separate classes is so that they can each elect a certain number of directors, as shown in the table above. The Commerce & Industry members are in fact the four chambers of commerce who each have their own seat in the Legislative Council "functional" (some would say, dysfunctional) constituencies. The IT Industry members are the 13 organisations whose members are eligible to vote in the LegCo IT functional constituency. The tertiary institution class is really just a legacy of the JUCC days.

The User class is open to anyone who currently owns a .HK domain and meets certain requirements, including any HK resident aged 18 or above, and any company registered in HK. However, membership is not quite automatic - in order to become a member of HKIRC, after purchasing your .HK domain, you have to sign up, but it costs nothing. Only a small fraction of the owners of the current 166,979 domains have become members. Still, the 1,278 User members (including your editor) are 96.3% of the membership, so they call the shots on any changes to the M&A of HKIRC, which requires 75% approval of the votes cast.

The secret problem

Nobody will say publicly exactly what, if anything, is wrong with the existing governance structure of HKIRC. Sources indicate to Webb-site.com that there have been disputes within the board and even with past board members, but there is nothing unusual about that - debate is a healthy thing and it would be unhealthy if every director had the same point of view on everything. Some sources have suggested personality conflicts, but again this does not imply a need to restructure the board in this wholesale fashion.

In May-07, the Government published a consultation paper on the administration of internet domain names in HK (Chinese version here). This was heavily reliant on a consultancy study which was commissioned by the Government in 2006. The study, which cost HK$1.29m, was never published until, on 25-Mar-08, we asked the Office of the Government Chief Information Officer (OGCIO) why not. On 16-Apr-08, a heavily censored version of the report was published on the OGCIO web site. It was virtually meaningless. We complained, and on 12-May-08, this was replaced with a still-heavily-censored report which you can read online.

By censoring the report so heavily, members of HKIRC are left with no justification for the EGM proposals. The blanked-out sections start in the Executive Summary of the Report on Current Environment, which says:

"The key issues and deficiencies that were identified during the analysis of corporate governance for the administration of internet domain names in Hong Kong were as follows:

[This part of the document is not disclosed.]"

...and it continues along those lines. In essence, they say "we can't tell you what's wrong, but you need to change it".

The proposed Government takeover

So without ever exposing the alleged "issues and deficiencies" to public scrutiny, the Government claims that there is a secret problem which makes it necessary to restructure the board as follows:

Theoretically, the Chairman would be elected by the directors from amongst themselves, but if they could not agree, then the Government would choose one of them. The Chairman would have a casting vote on all resolutions. These two facts together mean that the Government-appointed directors would only allow a candidate acceptable to Government to become Chairman, and then the Government could win any disputes with a 5:4 vote, including the Chairman's casting vote. This is, in essence, a thinly-disguised takeover.

As you can see, Users, who ultimately provide almost 100% of the income of HKIRC and account for 96% of its membership, would be demoted to just 2 out of 8 seats and 2 out of 9 votes (22%), from the current 6 out of 13 (46%), and the Government would have control through its appointees, whom it could replace at will.

The proposals would permanently lock in this structure, by changing the Memorandum of Association so that it would require Government consent to make any further changes at all to the M&A, because the following paragraph has been slipped into draft clause 8 of the Memorandum:

"Any proposal to vary the Company's Memorandum and Articles of Association...shall be notified to and agreed by the Government before such proposal is put forward for resolution by Members at a general meeting."

The EGM proposals also include a new "Consultative and Advisory Panel", all the members of which would be appointed by Government. However, the Board would not have to follow the CAP's recommendations, but would have to explain why on request by any Member or CAP if it chose not to. There is no reason why such a panel could not be formed and appointed by the existing board with similar requirements, so that does not justify the Government's takeover of the Board.

Membership frozen

If you hold a .HK domain and live in HK, then you are entitled by the M&A to become a member of HKIRC and then to vote on these proposals. There's even a big button in the bottom-left corner of the home page (reproduced on the right) which says "HKIRC Invites Domain Name Users to Become Members". However, it currently leads you to a page which says:

"To smoothen the administration and to avoid possible misunderstanding, membership registration is suspended from 26 Jun 2008 until the end of Annual General Meeting 2008."

Without any authority to do so in its M&A, HKIRC has closed the register to new members until the end of the AGM. The date for that has not even been announced, although past AGMs were in September, so it is closed for about 3 months. Management tells Webb-site.com that this practice, which it has used in past years, is needed to determine who is allowed to nominate or vote for directors at the AGM. We disagree - there is no need to close the register for that. Membership applications should be processed continuously in the usual timeframe, and on the relevant date (the nomination deadline, or the date of the meeting), you either are or are not a registered member, and a snapshot of the register can be passed to the scrutineer of the meeting.

Unlike a company with shares, there are no transfers of ownership to take place in a company limited by guarantee. Section 99 of the Companies Ordinance allows a company with a share or debenture register to close it for up to 30 days each year, but there is no such power for a company limited by Guarantee, unless it is built into the M&A, which it isn't in HKIRC's case. In short, we think the closure has no legal basis.

While this improper practice has been used in past years, it is doubly egregious this year because of the EGM. The final proposals were not disclosed to members until an e-mail was circulated on 26-Jun-08, after the register was closed, and you still won't find them on any public area of the web site.

No proxy voting

Section 116 of the Companies Ordinance states that a special resolution can be voted on by members "in person or, where proxies are allowed, by proxy", but the M&A of HKIRC says "proxy voting will not be permitted". Instead, the M&A says "Members may vote at a general meeting in person, by post or via the Internet...". Since the Companies Ordinance does not contemplate postal or internet voting, that means that on this, the most important vote in the history of dot-HK, you can only vote in person. In fact, even on ordinary resolutions, where the M&A allows postal and internet voting, such as appointment of auditors, HKIRC has in past AGMs failed to provide postal or internet voting. They only allowed it for director elections.

Votes in person can be held on a show of hands (1 vote per human attending the meeting, regardless of how many corporate members the person represents) or, if a poll is validly demanded, by poll, in which each person or company represented at the meeting has one vote.

No explanation

HKIRC has made a token effort to describe the proposals in a presentation to members on the evening of 8-Aug-08 from 17:00-18:30. Yes, the same evening as the opening ceremony of the Beijing Olympics - which do you think was the bigger draw? According to management, only about 12 members attended. Your editor was away on holiday, but we have obtained a copy of the presentation slides for your viewing. This really tells you nothing more than we have said. It is misleadingly titled "Rationale of New Governance Arrangement" but does not give you any insight on why a new arrangement is needed.

The Board of HKIRC owes members an explanation, by means of an EGM circular:

1.  Exactly what is wrong with the existing governance arrangements?
2. Why do the current directors believe that a Government-controlled board will do a better job of directing HKIRC than they have?
3. Why is Government control better than any third alternative?

A better way to reform

To be sure, HKIRC is not perfect:

• It is a monopoly which has been slow to innovate. Unlike some other countries, we do not yet have competition through a split registry-registrar model (in which registrars form the interface between users and a slim central registry) although we understand one is under planning.
• It's pricing is too high, partly because of the lack of registrar competition (this will come), although HK also lacks the economies of scale (fewer domains) that larger registries like .com have.
• It's own web sites are shambolic - again, no competition in the service space.

• IRC's disclosure should also be improved - we still don't have the 2007 accounts, but when they arrive, they will be bare-bones statutory accounts rather than an informative annual report. They should be capable of producing them within 3 months of the year-end.

None of this justifies the current proposals though. HKIRC can and should move ahead with the registry-registrar model, and should improve its disclosure, but the existing board could do this if it tried. One thing holding back governance is that, because HKIRC has claimed profits tax exemption, it cannot pay its directors anything. This discourages some good people from running for election and dedicating time to the job. No attendance records for board or committee meetings are published. Although HKIRC has had some very competent directors, it also attracts "status hunters" who are just looking for another line on their CV and wouldn't recognise an IP address if it sat on them.

So HKIRC should give up its tax exemption and start paying its directors a reasonable fee. This shouldn't hurt the finances, because it is not supposed to make a profit anyway, and because almost all the fee-earning business is in the subsidiary HKDNR, which does pay tax.

If anything, reform to the board structure should focus on eliminating the legacy seats of the JUCC and chambers of commerce, and broadening the constituency of the supply side to the members of the organisations who currently vote in the IT LegCo sector. Holding directors accountable to end-users is more likely to produce a better outcome than holding them accountable to Government (particularly an unelected one), and broader constituencies are closer to democracy than small-circle constituencies. If board size is an issue, then a board with 4 seats elected by users, 4 on the supply side, and 1 Government representative would be feasible.

In safeguarding the public interest in the .HK domain, the proper role of Government should be to set performance standards through the Apr-02 Memorandum of Understanding by which it designated administration of .HK to HKIRC, which can be updated from time to time (no, we cannot find a copy online). A single Government representative on the Board, to take part in discussions, is adequate for these purposes.

Protecting freedom of speech

There is another very good reason why control of the registry should not be in Government hands. It will avoid any temptation or political pressure to intervene in the domain registry. For example, you may be able to register falungong.hk today, but will you be able to in the future, and if you could, might it be deleted? What if Government comes under pressure to delete or divert a web domain such as remember-tiananmen.hk, or to delete a domain with sexually explicit content? Hong Kong's freedom of speech will be safer if the registry remains out of Government hands.

Turn out and vote!

Since last Wednesday, Webb-site.com has been in private discussions with HKIRC seeking a constructive solution to the issues in this article. We have urged them to delay or adjourn the EGM, and to open the register to membership applications (it should never have been closed in the first place). We have also urged them to produce a circular from the Board to members, explaining what the governance problem is (if any) and why they think Users should vote to reduce their own representation on the board and to give control to Government, and why they think this would lead to a better outcome. The board either doesn't believe this, or has chosen not to tell you why it does believe it.

Talks broke down on Monday when the CEO confirmed that the Chairman would proceed with the EGM and not adjourn it, and no EGM circular would be produced. We therefore urge all members to attend and vote against the proposals at the EGM on Saturday. In case you think that your vote won't make much difference, bear in mind that only 26 members voted at the last AGM (including 10 directors). It only takes a quarter of the votes to stop the takeover. With your help, we can do this.

WHERE: Unit 2002-2005, 20/F, ING Tower, 308 Des Voeux Road Central, Sheung Wan, HK (near Sheung Wan MTR)

WHEN: 08:30 onwards to register, 09:00 for the meeting, Saturday 23rd August 2008

Notice of EGM in English. Notice of EGM in Chinese.

© Webb-site.com, 2008

Organisations in this story

• HONG KONG INTERNET REGISTRATION CORPORATION LIMITED

Topics in this story

• Government intervention

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