22 April, 2017
The Market Misconduct Tribunal (“MMT”) found Mayer Holdings Limited (“Mayer”) and nine of its current and former executives, comprising the chairman, members of its board and its financial controller, in breach of the disclosure requirements under Part XIVA of the Securities and Futures Ordinance (“SFO”). The breach concerned the disclosure of the resignation of Mayers’ auditors which was made three weeks late.
In determining what constitutes inside information, the MMT accepted that the resignation of auditors, a potential qualified audit report identifying outstanding audit issues and substantial prepayments made to suppliers are typically viewed very negatively by the public, would be likely to materially affect the price of listed securities and were inside information. The fact that trading in the company’s shares was suspended at the time is irrelevant in determining whether information was inside information or not.
Significantly, the executives were found to have breached section 307G(2) of the SFO as they had not taken any reasonable measures to ensure that there were proper safeguards in place to prevent the breach of the disclosure requirements.
The MMT fined Mayer and the nine executives an aggregate of HK$10.2 million. Disqualification orders were also imposed upon the executives for periods ranging from 12 to 20 months.
Background
Mayer was listed on the Hong Kong Stock Exchange. At its request, trading in Mayer’s shares has been suspended since 9 January 2012.
On 29 February 2012, Grant Thornton Hong Kong Limited (“Grant Thornton”) was appointed to audit the Group’s financial statements for the year ended 31 December 2011. Between April and August 2012, Grant Thornton identified and communicated to Mayer’s management a number of outstanding audit issues, including:
- The suspicious nature of the disposal of a wholly-owned subsidiary for a consideration of HK$15,500,000;
- Mayer’s projects in Vietnam acquired at a consideration of HK$620,000,000 were not under Mayer’s control and their prospects were far less promising than originally valued and contemplated; and
- Substantial prepayments of US$10,000,000 and US$4,000,000 were made to two suppliers without security, which appeared to be irrecoverable.
By 23 August 2012, Grant Thornton sent a list of potential qualifications to the audit report to Mayer indicating that they would have to qualified their audit report if the outstanding audit issues were not resolved. From September 2012, Mayer provided no constructive response to Grant Thornton.
On 27 December 2012, following verbal communication between a partner of Grant Thornton and the financial controller of Mayer, Grant Thornton issued a resignation letter to Mayer. The resignation letter was addressed to “[t]he Audit Committee and the Board of Directors” and stated that “we hereby give you formal notice of our resignation as auditors of [Mayer] with immediate effect”. In the resignation letter, Grant Thornton reminded Mayer that the Listing Rules require Mayer to publish an announcement regarding any change in auditors as soon as practicable.
The financial controller verbally informed an executive director of the resignation letter on 28 December 2012. Both Mayer’s legal advisers and the Stock Exchange of Hong Kong also reminded Mayer of its disclosure obligation. Mayer only called a board meeting on 22 January 2013 to discuss the resignation letter, which was held on 23 January 2013. An announcement concerning the resignation was published on the same day.
MMT’s findings Inside information
The MMT concluded that: (i) the resignation of auditors; (ii) the potential qualified audit report; and (iii) the circumstances surrounding the prepayments were sufficiently specific and price sensitive, and therefore constituted inside information.
Disclosure requirements
The MMT stated that the disclosure of the resignation was a straightforward matter which could easily have been made within a day or two after 1 January 2013. The period from 1 to 23 January 2013 exceeded what was reasonably practicable. Mayer was therefore in breach of the disclosure requirements.
Officers’ liability
The MMT found that Mayer had no internal system, guidelines or policies in place at the time to comply with the disclosure requirements in relation to inside information. Moreover, there was no evidence that any of the officers had taken any reasonable measures to ensure that Mayer had proper safeguards to prevent the breach of the disclosure requirements. The MMT therefore found the officers in breach of the disclosure requirements under section 307G(2)(b)1.
Although a number of officers did not know about the inside information or only knew at a relatively late stage, the MMT observed, in the absence of reasonable measures taken by the officers to prevent a breach, it was not necessary to consider whether the conduct of the officer has resulted in a breach for the purpose of section 307G(2)(b). Causation is only required in considering whether there has been a breach under section 307G(2)(a).
Lessons learnt – need for reasonable measures to prevent breaches
The analysis and decision of the MMT is very much in line with the SFC’s “Guidelines on Disclosure of Inside Information” published in June 2012. We highlight a number of important themes for companies and their officers:
- It is essential to create and maintain effective systems and procedures so that potential inside information is promptly identified, assessed and escalated for the attention of the board of directors to decide about the need for disclosure.
- Officers, including non-executive directors, are responsible for ensuring that proper safeguards exist to prevent any breach of the disclosure requirements. This requires making sure that appropriate systems and procedures are put in place and reviewed periodically to enable a listed company to comply with the disclosure requirements. Those who do not may be held liable under section 307G(2)(b) of the SFO if the company is in breach of the disclosure requirements.
- Having no knowledge of the inside information in question is not a defence in a breach of section 307G(2)(b) if the officer has not taken all reasonable measures from time to time to ensure the company’s compliance with its disclosure requirements.
- In enforcement proceedings, the burden of proof will fall on officers to establish that they had taken all reasonable measures to prevent a breach of the disclosure requirements under Part XIVA of the SFO.
1 Section 307G(2) provides that: “If a listed corporation is in breach of a disclosure requirement, an officer of the corporation:
(a) whose intentional, reckless or negligent conduct has resulted in the breach; or
(b) who has not taken all reasonable measures from time to time to ensure that proper safeguards exist to prevent the breach, is also in breach of the disclosure requirement.”
For further information, please contact:
Melvin Sng , Partner, Linklaters
melvin.sng@linklaters.com
