Late Disclosure of Inside Information

Sanctions against company and senior officers for late disclosure of inside information

The Hong Kong Market Misconduct Tribunal (the “MMT”) held that Mayer Holdings Limited (1116.HK) (“Mayer”) and nine of its former senior executives (including, executive directors, non-executive directors, independent non-executive directors, and company secretary/financial controller) have failed to disclose inside information as soon as reasonably practicable under the Securities and Futures Ordinance (the “SFO”). The MMT ordered, among others, that:

Mayer and nine former senior executives pay a total fine of HK$4.65 million, ranging from HK$150,000 to HK$800,000 apiece;
Nine former senior executives be disqualified from being a director or being involved in the management of a listed corporation or any other specified corporation for a period ranging from 20 to 30 months for each; and
The Accounting and Financial Reporting Council be recommended to take disciplinary action against Mayer’s former company secretary and financial controller.

Remitted Proceedings

During the first disclosure proceeding, the chairman of the MMT had construed that section 307A(3) of the SFO to mean that in determining whether information not disclosed would if generally known “be likely to materially affect the price of the listed securities”, it should have regard only to the pre-suspension price of Mayer’s shares and not take into account events occurring during the period Mayer’s shares had been suspended.

Subsequently, the Hong Kong Court of Appeal on 5 June 2020 held that it was a wrong interpretation of the section 307A(3) of the SFO, and that the matter be remitted to the MMT to reconsider.

Securities Futures Commission’s case

The SFC’s case of non-disclosure against Mayer is that, in breach of section 307B(1) of the SFO, that Mayer failed to disclose as soon as reasonably practicable specific information about the company which comprised the following:

Resignation of its auditors;
The fact that the auditors would issue a qualified audit report if the issues identified by the auditors were not resolved; and
The auditors was concerned that one of the transactions may be irrecoverable and/or lacked commercial substance.

The information were (1) specific information about the company; and (2) not generally known to the persons who were accustomed to or would be likely to deal in the listed securities of the Company but would if generally known to them have been likely to materially affect the price of those securities.

Further, officers of Mayer were in breach of section 307G(2)(b) of the SFO by failing to take all reasonable measures from time to time to ensure that proper safeguard existed to prevent a breach of Mayer’s disclosure requirement

Relevant provisions from the SFO

The provisions dealing with the disclosure of inside information are contained in Part XIVA of the SFO. The requirement imposed on a listed corporation to disclose inside information is more particularly set out in Section 307B(1) of the SFO that:

“A listed corporation must, as soon as reasonably practicable after any inside information has come to its knowledge, disclose the information to the public.”

Section 307B(3) of the SFO expressly provides that “For the purpose of this Part, securities listed on a recognized stock market are to continue to be regarded as listed during any period of suspension of dealings in those securities on that market.”

Duty on officers of a listed corporation is set out in section 307G(1) of the SFO that:

“Every officer of a listed corporation must take all reasonable measures from time to time to ensure that proper safeguards exist to prevent a breach of a disclosure requirement in relation to the corporation”

Section 307G(2) of the SFO further provides that an officer of a listed corporation will become liable for the breach by the listed corporation of the disclosure requirements.

Legal issues relating to inside information

The MMT went at length to consider a number of legal issues pertaining to inside information –

“Inside information” requires that the information not be “generally known to the persons who are accustomed or would be likely to deal in the listed securities of the corporation but would if generally known to them be likely to materially affect the price of listed securities.”

The term ‘likely’ which appears twice in the definition of the definition of ‘inside information’.
The classes of persons who are accustomed or would be likely to deal in listed securities of the corporation.
The meaning of ‘materially’.
The impact and response, in consequence of the information becoming generally known.

MMT’s Decisions

In the remitted proceedings, the MMT found that:

On the balance of probabilities that in light of the cumulative impact the undisclosed pieces of information would have had on potential buyers and sellers of Mayer shares (even if they have been suspended), the undisclosed information (other than the information in respect of the Vietnam project), would have been likely to have had a material affect on the price of Mayer’s shares. Accordingly, the undisclosed information constitute ‘inside information’ under the SFO.
The absence of written guidelines and/or internal control policies in relation to statutory requirements to disclose inside information, which resulted in its breach of the disclosure requirement.
Non-executive directors have the same duties of care and skill and fiduciary duties as executive directors although executive directors have a greater responsibility in monitoring the proper application of internal guidelines and procedures to ensure that any potential inside information is placed before the board.
Officers of listed corporations were made aware that it was their responsibility to “establish and maintain appropriate and effective systems and procedures” in order to recognise information that may potentially be inside information and, once identified, to place it before the Board for it to assess whether this information needs to be disclosed.
There was no meaningful monitoring by the directors, both Executive and Non-executive, of the audit progress, the concerns of the auditors and no enquiry into the reasons for the delay in completing the audit.
In relation to the financial controller and company secretary of Mayer:
- The Tribunal held that on the balance of probabilities that the financial controller and the company secretary also in breach of the disclosure requirements under sections 307G(2)(a) and (b) of the SFO, that:
  - His post-resignation conduct in failing to immediately alert the board of Mayer in relation to the auditor’s resignation and the need to make an announcement; and
  - His performance as company secretary in not ensuring that measures were put in place within the company to prevent a breach by the company of the disclosure requirements.
  - The Tribunal further held that company secretary has the primary burden to ensure that safeguards exist to prevent the company’s breach of the disclosure requirements, and that the disclosure requirement was not breached.

MMT’s Orders

		Disqualification order (months)	Regulatory fine (HK$)	Recommendation for disciplinary action	Training order
SP1	Mayer	–	300,000	–
SP2	Financial controller / Company secretary	30	800,000	Recommended Accounting and Financial Reporting Council to take disciplinary action against SP2	Yes
SP3	Executive director / Chairman	30	800,000	–	Yes
SP4	Executive director (responsible for day-to-day management)	30	800,000	–	Yes
SP5	Independent non-executive director and chairman of audit committee	24	600,000	–	Yes
SP6	Executive director	20	300,000	–	Yes
SP8	Executive director	20	300,000	–	Yes
SP9	Non-executive director	20	150,000	–	Yes
SP10	Independent non-executive director (audit committee member)	20	300,000	–	Yes
SP11	Independent non-executive director (audit committee member)	20	300,000	–	Yes

The decision reiterates the importance of continued regulatory compliance. Senior executives (whether one is executive director, non-executive director, independent non-executive director, company secretary, or financial controller) of a listed corporation play an important role in the regulatory compliance of the listed corporation, and hence, they would be held accountant when their actions or inactions.

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