News & Insights

First concluded case in relation to late disclosure of inside information by a listed company

The first set of proceedings in the Market Misconduct Tribunal (the “Tribunal”) brought by the Securities and Futures Commission (the “SFC”) in relation to the disclosure obligations imposed on listed companies under the Securities and Futures Ordinance (the “SFO”) since they became effective on 1 January 2013 was recently concluded.

In July 2015, the SFC commenced proceedings against AcrossAsia Limited (“AAL”, a company listed on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited (the “Exchange”)), its former chairman (“Cheok”) and its chief executive offer (“Ang”).

In early November 2016, the Tribunal found them culpable of late disclosure of inside information.

In late November 2016, the Tribunal imposed the following sanctions and orders:

  • a total of HK$2 million regulatory fines – AAL: HK$600,000; Cheok: HK$800,000; and Ang: HK$600,000;
  • Cheok and Ang to undergo a training programme approved by the SFC on compliance with the disclosure obligations, directors’ duties and corporate governance; and
  • AAL, Cheok and Ang to pay the Government’s costs of the proceedings (totalling around HK$1 million) and the SFC’s investigation and legal costs (totalling around HK$4 million).

Brief summary of the background facts

In late December 2012, a 55%-owned subsidiary (the “Subsidiary”) of AAL filed a petition under Indonesian Law against AAL (the “Petition”) to suspend AAL’s obligation for payment of debts (being a US$44 million loan made by the Subsidiary to AAL in June 2011, which was due in June 2012, plus interest) temporarily to enable a composition plan to be presented to the Subsidiary and to appoint an Indonesian judge and administrators to manage AAL’s assets. The Indonesian Court issued a summons to AAL (the “Summons”) to appear in court to give testimony at the hearing of the Petition.

The key dates are as follows:

2 Jan 2013

AAL received the Petition and the Summons in Bahasa.

4 Jan 2013

Cheok and Ang received the English translation of the Petition and the Summons.

8 Jan 2013

Cheok and Ang instructed legal representatives for AAL.

9-15 Jan 2013

Cheok and Ang attended the court hearing of the Petition in Indonesia.

14 Jan 2013

The Exchange made verbal enquiries regarding the Indonesian proceedings.

15 Jan 2013

Trading of AAL shares was suspended from 9 a.m. at the request of AAL. The Indonesian Court granted the Petition.

17 Jan 2013

The SFC via the Exchange demanded that AAL issue a holding announcement relating to the Indonesian proceedings that day. A holding announcement was issued at round 7:33 p.m.

22 Feb 2013

Trading in AAL shares resumed. AAL share price fell 22.5%.

Breach of the disclosure requirement by AAL

AAL, Cheok and Ang admitted that the Petition and the Summons together with the information contained therein was “inside information” within the meaning ascribed to it under section 307A of the SFO, and that AAL failed to disclose to the public such inside information “as soon as reasonably practicable” after the said information had come to its knowledge, contrary to section 307B(1) of the SFO.

Breach of the disclosure requirement by Cheok and Ang

Cheok and Ang failed to ensure AAL’s compliance with its disclosure obligations. As officers of AAL, they could be found in breach of the disclosure requirement under section 307G(2)(a) of the SFO on the basis that their intentional, reckless or negligent conduct resulted in AAL’s late disclosure.

The SFC commenced the proceedings against Cheok and Ang on the basis of either their recklessness or negligence.

In the proceedings, AAL admitted breach on the basis that both Cheok and Ang had been negligent. Ang admitted on this basis too but Cheok denied any such a breach until recently in early November. The SFC accepted negligence as the basis and did not pursue the allegation of recklessness.

Relevant date of failure: 4 January or 8 January 2013?

The SFC alleged AAL’s failure to disclose inside information as being on or about 4 January 2013 (being the date on which Cheok and Ang received the English versions of the Petition and the Summons), whereas AAL and Cheok placed it on 8 January 2013 (by which time legal advice was obtained).

The Tribunal unanimously agreed that given the wording “as soon as reasonably practicable” used in the statutory provision, “it was unrealistic to expect the announcement on 4 January 2013 as proper legal advice leading to a rational and comprehensive understanding of the legal position in the foreign jurisdiction had not been received”. Therefore, the Tribunal considered that the relevant date was 8 January 2013, namely the date by which legal advice had been obtained.

Given that the holding announcement was issued on 17 January 2013, the actual gap from when an announcement should have been made to the actual making of that announcement was just over a week.

Factors that the Tribunal took into account in determining the sanctions imposed

The Tribunal found on the facts that there was much mitigation in this case thus placing the level of seriousness firmly towards the bottom of the scale.

In determining the sanctions to be imposed, the Tribunal considered the following:

  • none of AAL, Cheok and Ang has previous record for market misconduct;
  • the delay was short – just over a week;
  • apart from the incident in question, AAL regularly and properly made public announcements of inside information regarding the various court proceedings affecting it;
  • AAL shares were a thinly traded stock – the loss to investors would only have been $549 for 8 to 15 January 2013 even if the whole loss could be attributed to the failure to disclose properly, showing that the market was little affected or threatened by the misconduct;
  • Cheok and Ang had behaved responsibly and diligently by attending the court hearing, arranging the legal advice and obtaining translations;
  • the market misconduct had not led to any monetary or other advantage for any of AAL, Cheok and Ang; and
  • each had admitted fault albeit at different times – AAL and Ang had indicated on 17 February 2016 that they admitted the misconduct, and hence they were given a discount to the amount of fine to acknowledge their early admissions and saving of expense. Cheok admitted on 2 November 2016, and so he was fined a higher amount.

Key takeaways

The breaches of the disclosure requirements by AAL and its two officers have attracted regulatory fines totalling HK$2 million, plus liabilities for payment of costs of the Government and the SFC for investigation and proceedings totalling over HK$5 million.

The Tribunal decided on the imposition of such sanctions after finding that AAL’s case was “very much towards the bottom of the scale”, considering there was much mitigation, including, among other things, the delay was just over a week, admission of fault by the parties and AAL’s stock was thinly traded.

It can be envisaged that in more serious cases where the delay is much longer and more investors have suffered losses as a result of the late disclosure, the sanctions to be imposed are likely to be much more severe. In appropriate cases, the Tribunal may also impose other orders such as disqualification orders, “cold shoulder” orders and “cease and desist” orders.

The SFC has in recent years stepped up its enforcement efforts directed at listed companies-related issues. Earlier this year, the SFC has commenced two other sets of proceedings against two listed companies for late disclosure of inside information (please refer to our earlier client alerts). We expect to see more in the future.

It is therefore vital for listed companies’ senior management to be reminded of their responsibility to ensure the listed companies duly comply with their obligations to timely disclose inside information to the public as required under the SFO.

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