Dec 18 Legal Update
Two cases on information to shareholders
(i) Disclosure of inside information (“positive profit alert”)
SFC commenced proceedings in the Market Misconduct Tribunal (“MMT”) against CMBC Capital Holdings Limited and 6 former (executive and independent non-executive) directors, for failing to disclose inside information as soon as reasonably practicable. (Click: press release; MMT notice)
Key issue is material improvement in financial performance should have been apparent from internal management accounts.
What you should know/watch out for:
- Nature: delay in disclosure — material improvement in performance
- Monthly management accounts relevant: improvement should have been apparent by the fifth month of the interim period
- Being specific information regarding the company; price sensitive and not generally known to the public at the material time
(i) interim results (6 months to Sept 13): loss of $12m
(ii) full year 13: profit of $417m
— (13 Oct 14): those directors received consolidated management accounts for the first five months, reflecting significant improvement in performance (profit: $838m)
— (7 Nov 14): finally issued profit alert
- Those directors, being officers, are alleged to be in breach for reckless or negligent conduct causing alleged breach by company
- (Click: our Nov 18 legal update on a similar (but “profit warning”) case)
(ii) HKEX censured Shenji Group Kunming Machine Tool Company Limited and former chairman, for failing to ensure information contained in an announcement was accurate and complete in all material respects and not misleading. (Rule 2.13(2) (Click: Press release).
The company made an announcement that its substantial shareholder had entered into an agreement to sell its entire 25% interest to a third party. Stated completion conditions include approval by state-owned assets commission of PRC State Council.
A 3-month deadline in completion contained in the agreement was not announced.
Such approval was not obtained by the deadline, and agreement terminated.
Company defended that it was not a party to the negotiations. Draft announcement was prepared based on information and previous drafts of agreement provided by the parties (not containing the completion deadline). Announcement was made under a tight timetable.
What you should know:
- The deadline is a material term
- Significant movements in trading volume, after company made first announcement, then progress and termination announcements
- Rejected above defences
— Final agreement provided to former chairman (“only 6 pages long”)
— Could have ensured careful review, for announcement preparation
- Breach of directors’ duties (Rule 3.08 (f))
— Duties of skills, care, and diligence to a standard at least commensurate with HK law
— i.e. reasonably expected of a person of his knowledge and experience, holding his office
— Was on the board for 8.5 years (ED and chair for over 4 years)
- Breach of Directors’ Undertaking include:
— Own compliance with Listing Rules to best ability
— Best endeavours to procure Company’s compliance
What you should watch out for:
- The high standard expected in ensuring accuracy of announcements; and directors’ duties
- Directors duties being an enforcement focus
Also in this issue