On 20 March 2013, the Securities and Futures Commission (“the SFC”) obtained from the High Court, disqualification orders against the former Chairman, as well as the former Financial Controller/ Company Secretary, of Sunlink International Holdings Ltd (“Sunlink”)for failing to make timely disclosure of price sensitive information to the market.
The events in question happened in 2008 and the SFC relied on section 214 of the Securities and Futures Ordinance (“the SFO”) (Cap 571) which allows the Court to grant remedies in cases of unfair prejudice to the interests of listed companies’ shareholders. The significance of this case is that with the coming into effect of the new statutory disclosure regime on 1 January 2013, the SFC can now take disclosure proceedings in the Market Misconduct Tribunal against similar conduct.
Under Section 307B of the new Part XIVA of the SFO, a listed corporation must, as soon as reasonably practicable after any inside information has come to its knowledge, disclose the information to the public, unless the information falls within any of the Safe Harbours as provided in Section 307D of the SFO.
Under Section 307G of the SFO, every officer of a listed corporation is required to take all reasonable measures to ensure that proper safeguards exist to prevent a breach of a disclosure requirement in relation to the listed corporation. If a listed corporation is in breach of a disclosure requirement, an officer of the corporation is also in breach if his/her intentional, reckless or negligent conduct has resulted in the breach or if he/she has not taken all reasonable measures to put in proper place safeguards to prevent the breach in question.
Under Section 307N of the SFO, failure to comply with the disclosure requirements may give rise to various civil sanctions, affecting not only the listed corporations, but also the individual officers. One of the sanctions is almost the same as the one provided for in this case under section 214(2)(d), namely the disqualification of the person as director of a listed company or to prevent him from taking part in the management of a listed company. There are differences between section 214 and Part XIVA, for example (1) under section 214(2)(d), the maximum sanction is 15 years, whereas the maximum under section 307N is 5 years; (2) the adjudicating body is the Market Misconduct Tribunal for disclosure proceedings as opposed to the High Court for applications under section 214; and (3) the matters that constitute a breach and that need to be proved by the SFC are also different.
In this case, the Court heard that Mr. Andy Wong Shu Wing (“Wong”), the former Chairman and executive director of Sunlink , a listed corporation on the main board of the Stock Exchange of Hong Kong Limited (“the SEHK”) since March 2003 and Mr. Lee Chak To (“Lee”), former financial controller and company secretary of Sunlink failed to manage Sunlink with the necessary degree of skill, care, diligence and competence as is reasonably expected of persons of their knowledge and experience. They also failed to ensure that Sunlink disclosed, in a timely manner, a number of material events in October and November 2008, concerning the financial position of Sunlink to its members, the general investing public and the SEHK. The material events were as follows:-
Having heard the case, the Court disqualified Wong and Lee from being directors or taking part in the management of any listed corporations, without leave of the Court, for five and three and a half years respectively. The disqualification orders took effect on 10 April 2013.
Even though the order in this case was not made pursuant to the new SFO provisions, as described above, this is a precedent case where sanction was imposed against listed company directors for failure to comply with disclosure obligations. It is also apparent that the SFC will prosecute those who fail to comply with the disclosure obligations.
Whilst the maximum penalty for disqualification is only 5 years under section 307N (as opposed to 15 years under section 214), it is believed that the SFC will rely on the new provisions which were introduced to address disclosure issues by listed companies. Furthermore, under section 307N , other civil sanctions can be imposed, not only against the directors, but also the listed company.