Failure to Disclose Inside Information in a Timely Manner May Lead to ...

Introduction
On 11 March 2016, the Securities and Futures Commission (the “SFC”) commenced proceedings in the Market Misconduct Tribunal (the “MMT”) against the listed company Mayer Holdings Limited (“Mayer”) and ten of its current and former senior management staff, for failing to disclose inside information as soon as reasonably practicable, as required under Part XIVA of the Securities and Futures Ordinance (the “SFO”). The move marks the SFC’s second attempt, after the proceedings against AcrossAsia Limited (“AcrossAsia”) in July 2015, to take action against listed companies and their officers for breach of the statutory disclosure obligations, since Part XIVA of the SFO came into force in 2013.

The Statutory Disclosure Regime of Inside Information
Very briefly, inside Information means specific information about a listed corporation, or a shareholder or officer of the corporation, or the listed securities or derivatives of the corporation, that is not generally known to the market, and is likely to materially affect the price of the listed securities if generally known (section 307A of the SFO).

Under section 307B(1) of the SFO, a listed company is required to disclose as soon as reasonably practicable after any such inside information has come to its knowledge. Section 307G further imposes a personal obligation on the officers of listed companies to take all reasonable measures to ensure the company’s compliance, and the officers may be personally liable if the listed company is in breach of the disclosure requirement as a result of his or her intentional, reckless or negligent conduct.

Background Facts
Mayer is a company that became listed on the Main Board of the Stock Exchange of Hong Kong Limited in June 2004, which principally is engaged in the processing and manufacturing of different kinds of steel sheets and steel pipes.

The SFC alleges that between April and August 2012, while auditing Mayer’s financial statements for the year ended December 2011, the then auditors of Mayer repeatedly communicated with Mayer’s management about the following issues that they had identified:

1.         the suspicious nature of the disposal of a wholly-owned subsidiary of Mayer, for HK$15.5 million;

2.         Mayer did not have control over the projects in Vietnam, which it bought for HK$620 million, and their valuations appeared to have been inflated; and

3.         two subsidiaries of Mayer’s jointly controlled entity had made substantial prepayments of US$10 million and US$4 million respectively without security to suppliers which appeared to be irrecoverable.

(collectively, the “Outstanding Audit Issues”)

In view of the Outstanding Audit Issues, on 23 August 2012, Mayer’s then auditors sent a list of “potential qualifications to the audit report” to Mayer, indicating that they would have to qualify their audit opinion if the Outstanding Audit Issues were not resolved. From about September 2012 onwards, no constructive responses have been provided by the Company or its directors or the Audit Committee to address the Outstanding Audit Issues.

On 27 December 2012, Mayer’s then auditors resigned and a resignation letter was addressed to “The Audit Committee and the Board of Directors” of Mayer. In the resignation letter, Mayer’s then auditors expresses the view that despite their “continuing efforts” to take the audit forward and resolve the Outstanding Audit Issues, Mayer was unable to provide the information requested.

On 23 January 2013, Mayer published an announcement to disclose the then auditor’s resignation together with a brief summary of the Outstanding Audit Issues.

The Alleged Breach
The SFC alleges that Mayer failed to disclose three categories of inside information within the meaning of section 307A of the SFO, namely:

1.         the auditor’s resignation;

2.         the Outstanding Audit Issues and the indication by Mayer’s then auditors that they would issue a “qualified audit report”; and

3.         the circumstances surrounding the US$10 million prepayment to the supplier.

In the eye of the SFC, Mayer failed to disclose the above inside information as soon as reasonably practicable after the information had come to its knowledge. There was a delay of 3 weeks before the said inside information was published through the announcement. Besides, the SFC also considers that each piece of the above inside information did, or ought to reasonably have, come to the knowledge of Mayer’s ten current and former senior management, in the course of performing their duties as officers of Mayer. Accordingly, they failed to ensure Mayer’s compliance with the disclosure obligations under the SFO.

Therefore, the SFC commenced MMT proceedings against Mayer for its failure to disclose inside information under section 307B of the SFO, as well as the ten current and former senior management staff of Mayer for their reckless or negligent conduct which allegedly led to Mayer’s failure to disclose inside information under section 307G of the SFO.

Conclusion
The commencement of these MMT proceedings sends a clear message to listed companies that delayed disclosure of inside information may result in enforcement actions being taken, not only against the listed companies themselves, but also against their senior management staff if their conduct have led to the listed companies’ breach of the disclosure requirements.  As the proceedings have just started, it is premature to judge if the disclosure made on 23 January 2013 would be considered too “late“ for the purpose of 307B(1) of the SFO. For the sake of discussion, it appears that the SFC takes the view that Mayer could have made known to the market the inside information as identified by the SFC, or at least part of it, well before 23 January 2013. Although it can be argued that it was premature to make disclosure back in August 2012, it became clear by 27 December 2012 that the matters remained unresolved which led to the resignation of the auditors. The SFC appears to take the view that Mayer failed to have made proper disclosure as soon after that as reasonably practicable.

It should also be noted that unlike the MMT proceedings against AcrossAsia in July 2015 that was brought only against the company, its chairman and its chief executive officer, ten senior management staff of Mayer (including its company secretary, financial controller, non-executive director and independent non-executive directors) were involved in the current case. Senior management of listed companies are therefore reminded to take steps to ensure that the listed companies comply with their obligations to disclose inside information in a timely manner after such information had come to their knowledge.

Published by ONC Lawyers © 2016