10 May, 2017
The Hong Kong Court of Appeal has dismissed an appeal by the Securities and Futures Commission (“SFC”) against the findings of the Market Misconduct Tribunal (“MMT”) that two former executives of Asia Telemedia Limited (“ATML”) had not engaged in insider dealing in ATML shares. This is a rare recent case in which the defence of “no profit motive” to insider dealing under section 271(3) of the Securities and Futures Ordinance (“SFO”) has been examined by the Court of Appeal.
Section 271(3) provides a defence to insider dealing where a person, having dealt in the shares of a listed company when knowingly in possession of price sensitive information, can establish that when he dealt, “the purpose for which he dealt … was not, or where there was more than one purpose, the purposes did not include, the purpose of securing or increasing a profit or avoiding or reducing a loss, whether for himself or another, by using relevant information.”
The Court of Appeal refused to extend the meaning of “use” in section 271(3) of the SFO to cover withholding or non-disclosure of relevant information. A defence under s271(3) would therefore be established if the accused can establish, on a balance of probabilities, that although he was knowingly in possession of price sensitive information, that was not a factor inducing him to deal. It is not sufficient to establish that the price sensitive information was only a subsidiary motivating factor, it must be established it was not in any way a causative factor.
Background
ATML was an insolvent company due to a longstanding debt owed to Madam Liu Lien Lien (“Madam Liu”). Madam Liu had issued and served five statutory demands on ATML but has not taken legal proceedings. As at 1 February 2007, the debt stood at HK$58 million with interest.
On 1 February 2007, Madam Liu assigned the debt to Goodpine Limited and four days later, Goodpine’s solicitors sent a notice of assignment together with a demand for full payment to ATML’s solicitors. On 26 April 2007, ATML received a statutory demand from Goodpine’s solicitors demanding payment of HK$70 million. In May 2007, ATML offered by pay HK$8 million but there was no response from Goodpine. On 6 June 2007, Goodpine served a winding up petition on ATML and trading in its shares was suspended from 7 June 2007.
Between February and May 2007, the share price of AMTL surged from around HK$0.20 to HK$0.97, apparently riding on a speculative wave of “small cap” stocks and not supported by any realistic fundamentals.
Between February and June 2007, two senior executives of ATML at the time, Mr Charles Yiu (Executive Director and Financial Director) and Ms Marian Wong (Company Secretary), sold ATML shares by exercising their share options.
ATML announced that it had been served with a winding-up petition on 15 June 2007. When trading resumed on 18 October 2007, its share price close at HK$0.315, a 62% drop compared to the closing price of HK$0.83 on 6 June 2007.
The issue
The MMT found that the assignment and the statutory demand taken together constituted relevant information, and both Mr Yiu and Ms Wong knew that the assignment and the statutory demand were relevant information with a likely negative material effect on the share price of ATML. The main issue on appeal is whether the defence to insider dealing under section 271(3) of the SFO has been made out.
Section 271(3) provides a defence where a person, having dealt in the shares of a listed company when knowingly in possession of price sensitive information, can establish, on a balance of probabilities, that when he dealt, “the purpose for which he dealt … was not, or where there was more than one purpose, the purposes did not include, the purpose of securing or increasing a profit or avoiding or reducing a loss, whether for himself or another, by using relevant information.” (emphasis added)
Pursuant to this provision, if the accused can establish on a balance of probabilities that although he was knowingly in possession of price sensitive information, that was not a factor inducing him to deal, then he is not an insider dealer. It is not sufficient to establish that the price sensitive information was only a subsidiary motivating factor, it must be established it was not in any way a causative factor.
The MMT accepted that both Mr Yiu and Ms Wong exercised their share options for the only reason that there was a sudden and speculative surge in the price of ATML shares, the motivating factor being to profit from the speculative boom. The MMT was also satisfied that both Mr Yiu and Ms Wong believed that the threat presented by Goodpine could be sorted out behind closed doors and would not become a matter to influence the market.
Court of Appeal’s findings
The SFC’s complaint in the appeal was that it cannot be right that senior executives who had withheld information which they knew would significantly impact share price should be able to deal with the shares and make profit without liability. Two grounds of appeal were advanced by the SFC.
Error of law
The SFC contended that the meaning of “using” in section 271(3) of the SFO was broad enough to cover “withholding” or “non-disclosure” of relevant information. This was rejected by the Court of Appeal. The Court of Appeal found that extending the meaning of “use” in this way would have the effect of equating “use” with “possession” such that any senior executive in possession of relevant information would be deemed to have withheld information regardless of the reason and whether it was the executive that caused the information to be withheld, so that there would always be a mischievous purpose in any dealing, making the statutory defence illusory.
The SFC also made a suggestion on appeal that Mr Yiu and Ms Wong had knowingly and directly contributed to the maintenance of a falsely inflated share price of ATML by withholding the relevant information. However, this argument had not been advanced by the SFC before the MMT and the Court of Appeal refused to inquire into this point in the appeal on grounds of procedural fairness.
Factual findings
The SFC also sought to challenge two findings of fact made by the MMT, that Mr Yiu and Ms Wong believed the debt would be settled behind closed doors and that their sole motivating factor in exercising their share options was to profit from the speculative boom. As the MMT had given full explanation as to why the evidence of Mr Yiu and Ms Wong was accepted on these two matters, the Court of Appeal refused to interfere with the MMT’s factual findings.
Conclusion
On the facts of this case, the former executives of ATML were able to successfully make out the “no profit motive” defence. However, as the MMT has pointed out, only in rare circumstances will a person who deals in shares in a listed company while in possession of price sensitive information be able to demonstrate that the price sensitive information was not in any way a causative factor.
The full judgment is available here.
For further information, please contact:
Melvin Sng , Partner, Linklaters
melvin.sng@linklaters.com
