8 May, 2017
On 28 February 2017, the MMT found that Yorkey, its CEO Nagai Michio and CFO Ng Chi Ching had each breached their statutory obligation to disclose inside information.
Facts
In its Interim Results for the first six months of 2012 (released 16 August 2012), Yorkey’s revenue decreased compared to the same period in 2011 by 12.1%. Net profit had also fallen by 62%.
Nonetheless Yorkey stated that it expected significant growth and increasing profitability in the second half of the year.
No growth or profitability followed. In fact in the second half of 2012 Yorkey sustained material losses and its financial performance deteriorated significantly.
No profit warning was made and Yorkey did not tell the public that the company would not be achieving the significant growth and increased profitability it had stated was expected.
Yorkey announced its 2012 results on 25 March 2013 (after Part XIVA had become law) when the company reported:
(i) a loss before tax of US$136,000 (profit before tax was US$7.531 million in 2011); and
(ii) net profit (after tax credit) had declined by 99% from 2011. Yorkey’s revenue and profitability had also decreased in the second half of 2012.
Yorkey’s Share Price
In the 3 days after reporting its 2012 results, Yorkey’s share price fell by 21.25% from HK$0.80 to HK$0.63 per share.
Investigation
The SFC found:
1. Yorkey prepared monthly management accounts which would be available in the middle of the next month for review by Mr Michio;
2. The monthly management accounts for October, November and December 2012 showed Yorkey incurring significant net losses for those months; and
3.In mid-January 2013, internal accounts for 2012 were available and passed to Mr Michio, so he was aware of the company’s deteriorating performance by then at the latest.
Inside information
The MMT concluded that Yorkey’s low turnover and losses contained in October to December 2012’s monthly management accounts satisfied the definition of inside information (section 307A(1) SFO) being specific information relating to the company, not generally known to the public and which would materially affect Yorkey’s share price.
Furthermore, the monthly results from July to November were sufficiently poor to indicate to management that 2012’s results would be much worse than expected.
When disclosure of the inside information should have happened?
The MMT found that Mr Michio in performing his duties as CEO of Yorkey had (or ought reasonably to have) come to know of the company’s deterioration by mid-January 2013 at the latest (when he had the monthly management accounts for December and 2012 internal accounts). At that point in time the obligation to disclose the inside information as soon as reasonably practicable existed and as stated above, that was breached because the public was not informed of Yorkey’s poor performance until 25 March 2013 (two months later).
Mr Michio and Mr Ng, Yorkey’s officers, breached section 307G of the SFO for failing to have taken all reasonable measures to prevent the company from breaching its disclosure obligations. The MMT also found that both were aware of Yorkey’s deterioration well before the company published its 2012 results (on 25 March 2013) and were reckless or negligent for failing to take any steps to ensure the disclosure of the information to the public. As a result, the MMT ordered:
- Yorkey and Mr Michio each pay a fine of HK$1 million;
- Mr Michio and Mr Ng be disqualified from being a director or involved in the management of a listed company for 18 and 15 months respectively. The SFC has recommended Mr Ng, an accountant, be disciplined by the HKICPA;
- The SFC’s investigation and MMT costs be paid by Yorkey, Mr Michio and Mr Ng; and
- Yorkey’s disclosure procedures be reviewed, Mr Michio and Mr Ng attend SFC approved training.
What next? Civil liability for Mr Michio and Mr Ng…
On the MMT’s finding, section 307Z of the SFO imposes a statutory civil obligation on Mr Michio and Mr Ng to pay compensation to any person who has suffered a loss following their failure to make a timely disclosure of the inside information provided it is ‘fair, just and reasonable’. On the face of it, such claimants would be the purchasers of Yorkey’s shares after the disclosure obligation existed and who lost 21% in the value of their investments when the company’s share price fell.
It will be interesting to see how this part of the law develops. The sting in the tail for Mr Michio and Mr Ng is most definitely the prospect of civil claims under section 307Z. However, they both may also have breached their duties to Yorkey entitling the company to bring a claim against them for the loss and damage it was caused.
Things for listcos and officers to note
The case illustrates how substantial fines and lengthy disqualification orders will be given. Listed companies and their officers need to be careful when reviewing internal management accounts and draft accounts and aware to disclose any unexpected loss (or profit).
Finally, officers need to bear section 307Z SFO in mind and the potential liability they may be subjected to on failing to make a disclosure when necessary and/or when not having put in place systems to bring such information to their attention.
For further information, please contact:
Ian Childs, Stephenson Harwood
ian.childs@shlegal.com
