8 May, 2017
On 4 March 2016, the MMT was asked by the SFC to determine if the disclosure requirements of sections 307B and 307G of the SFO had been breached and to identify those responsible. In total, aside of Mayer, 10 officers of the company were before the MMT.
'Officer' is defined widely in the SFO as a director, manager, secretary or anyone else involved in the company’s management.
On 7 February 2017, the MMT found Mayer and all officers save one (who could not be served with the proceedings) in breach of the Part XIVA. On 5 April 2017, the MMT imposed heavy sanctions on them all.
Factual background
Mayer had been listed in 2004. Its shares had been suspended on 9 January 2012.
Tommy Chan Lai Yin (“Chan”), a qualified accountant was Mayer’s financial controller and company secretary. Lai Yuet Hsing (“Lai”) was an executive director and largely responsible for running Mayer’s business with Chan.
The other officers before the MMT were all directors of Mayer, including one non-executive
director (“NED”).
Audit issues
Between April and August 2012, Grant Thornton (the “Auditor”) had communicated repeated issues with Mayer’s management about the company’s 2011 financial statements (“outstanding audit issues”). The Auditor’s report would be qualified if these issues weren’t resolved. From September 2012, Mayer, its directors or audit committee avoided the issues.
On 27 December 2012, in a letter to Mayer’s board and audit committee, the Auditor resigned with immediate effect. The letter reminded Mayer it needed to quickly publish an announcement about the resignation as required in the Listing Rules. In legal advice (on 31 December), a fax from the Stock Exchange (on 15 January) and reminders from the then ex-
Auditor (on 16 January), Chan and Lai were reminded to make a public announcement.
No announcement was made: the directors were not even told about the Auditor’s resignation until 18 January 2013.
Thereafter, Mayer’s board only met on 23 January 2013 and an announcement about the Auditor’s resignation was published on the same day.
MMT’s decision
The MMT agreed with the SFC that each of the Auditor’s resignation, the outstanding audit issues and unsecured and irrecoverable payments of US$14 million to a supplier were about Mayer, specific and generally not known and therefore inside information requiring public disclosure as soon as was reasonably practicable – which Mayer had failed to do in breach of section 307B SFO.
Auditors’ resignation announcement
It was argued the suspension of Mayer’s shares in early 2012 rendered any resignation announcement unnecessary.
However, section 307A(3) SFO mandates that shares ‘are to continue to be regarded as listed during any period of suspension…’, therefore Part XIVA continued to apply to Mayer.
The MMT found that public disclosure of this insideinformation should have happened within 1-2 days of legal advice about the resignation letter coming to Mayer’s attention (such had happened when Chan was legally advised to make an announcement on 31 December 2012).
If Mayer disagreed with the Auditor’s reasons they could have explained why in their announcement. It was unacceptable not to make the announcement and disclosure on 23 January 2013 by Mayer was unreasonable particularly in light of the multiple reminders Chan/Mayer had received (see above).
It was also argued Chan’s disclosure of the resignation to the Stock Exchange discharged Mayer’s obligations.
This was rejected because it was not a disclosure that gave ‘equal, timely and effective access to the public’.
As a matter of law, dissemination of inside informationon the Stock Exchange’s electronic publication system
complies with the SFO.
Qualified audit and irrecoverable payments
The MMT found that:
- A qualified audit would be viewed negatively, cast serious doubt about a company’s accounts and may even suggest fraud; and
- The amount of the prepayments to the supplier could exceed 10% of Mayer’s shareholders’ funds and might involve fraud, therefore, as a result, this information should also have been disclosed by Mayer.
Directors’ disclosure obligations
Chan, Lai and the other officers of Mayer were under a statutory duty to take all reasonable measures to ensure proper safeguards existed to prevent any breach of Mayer’s disclosure obligations. In 2012/13 Mayer had no internal systems or written procedures in place to comply with Part XIVA. As a result, all the officers were in breach of section 307G SFO.
NED
The NED was only told of the resignation by Chan on 18 January 2013. Nonetheless, the MMT found the NED in breach of the SFO because of his failure to comply with section 307G and ensure proper safeguards existed to prevent Mayer’s breach.
The MMT found it relevant that the NED had not complained about the lack of systems and policies (he might have had a defence if he’d done so).
Disqualification as a director or manager of a listed corporation
The maximum period of disqualification for directors breaching Part XIVA is 5 years (section 307N SFO). The MMT stated the most serious cases with repeat offenders could expect disqualifications for between 3.3 to 5 years. Serious cases but first offences would attract disqualification for 2 to 3.3 years. The least serious cases would attract disqualification for up to 2 years.
The MMT felt not disclosing the Auditor’s resignation for 23 days warranted disqualification orders of 1 year for
all the officers save Chan and Lai.
These officers had an inescapable personal liability to comply with Part XIVA and their, in particular the
NED’s, ignorance and incompetence was no excuse.
Chan and Lai deliberately flouted the disclosure regime.
They knew a disclosure was needed but chose not to, concealing the Auditor’s resignation from Mayer’s board. The MMT found them to be unquestionably unfit to be a director of a listed company. They were both disqualified for 20 months.
Regulatory fines
Chan and Lai were each fined HK$1.5 million for their breaches. Mayer and the other officers were fined HK$900,000 (the maximum fine is HK$8 million).
Mayer and the NED pleaded they were in dire financial circumstances. The MMT dismissed this as a bare assertion. The MMT stated if a party wanted to raise their financial resources as a ground for a lower fine, full and frank disclosure of his financial position was needed. Neither Mayer nor the NED had done so.
Mayer and the officers were also ordered to pay costs.
Mitigation
While Mayer had admitted liability for breaching Part XIVA at the MMT hearing, it was held to be much too late to be a factor.
Finally
The MMT decided to recommend that Chan be disciplined by the HKICPA. It was stated accountants had an important role in the listing regime and are relied on by the public for their expertise in audit and compliance. Chan’s conduct was stated to be appalling in ignoring the Stock Exchange’s and Mayer’s solicitor’s advice
For further information, please contact:
Ian Childs, Stephenson Harwood
ian.childs@shlegal.com
