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Oct 16 Legal Update

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SFC case: directors’ duties in approving transactions?

SFC commenced legal proceedings in the Court of First Instance (click here for press release) to seek disqualification orders against 10 former and current directors of Freeman FinTech Corporation Limited, including managing director, a former nonexecutive director and named independent directors for breaching director duties in the acquisition and disposal of a 24% stake in Liu’s Holdings Limited (“Liu Family Company”).

In addition, it sought compensation order against the managing director and non-executive director closely involved in the transactions.

The group entered into an acquisition in January 2011 (“Acquisition”) for the stake in Liu Family Company. Other Liu family shareholders of the target objected. The group could not complete the acquisition and subsequently disposed the shares, resulting in a loss of $76 million.

What you should know/watch out for:

We should note the alleged breach of duties by the directors (including independent directors):

  • failed to act in good faith and in the best interests of the company including a duty to disclose relevant material information to the company and shareholders
  • false or misleading statements in company announcements
  • failed to exercise reasonable care, skill and diligence in procuring or allowing the group to enter into the acquisition and/or the disposal
  • failed to take steps to pursue persons closely involved in the transaction for the loss

This is an important case, in the context of appreciating “directors’ duties” involved in approving transactions.

Directors’ duties represents a recurring theme, and the SFC has been active in enforcing it.

SFC also launched a review to assess the cybersecurity preparedness, compliance and resilience of brokers’ internet and mobile trading systems. (click here for press release) It highlighted increased cybersecurity incidents in the past 12 months, involving unauthorized trades in excess of $100 million. Cybersecurity management is a priority for the SFC’s supervision of licensed corporations.

What you should know/watch out for:

  • Cybersecurity is not for the IT department alone. In an earlier circular, SFC also drew attention to key areas of concern: (i) coverage of cybersecurity risk assessment exercises; (ii) cybersecurity risk assessment of service providers; (iii) cybersecurity awareness training; (iv) cybersecurity incident management arrangements; and (v) data protection programs. Read a law firm’s commentary.
  • Cybersecurity should be a key “risk management” item of all listed companies, in light of ever increasing technology applications. You should have adequate risk identification, governance, and mitigation systems in place.



Competition Commission: trade associations as a focus

The Competition Commission published its first annual report. It highlighted the fact that it reviewed the published practices of over 350 trade associations. “High risk practices” included: (i) price recommendations and fee scales; (ii) provisions in codes of conduct restricting competition between members (e.g. restrictions on undercutting fee quotations of other members for the same service).

What you should know/watch out for:

  • To better understand “potentially anti-competitive” practices relating to trade associations, read a useful summary (p.54 of annual report) of practices voluntarily abandoned
  • A specialist law firm (click here to read its commentary) observed that the Commission appeared to have been in discussions with relevant parties regarding competition issues arising from the Hong Kong Association of Banks’ Code of Banking Practice.  They principally relating to the level at which fees and charges are to be set by authorised institutions
  • As covered in our May 16 update, listed companies should review involvement with trade associations—watch out for practices that may be anti-competitive, and establish policies and procedures (“do’s and don’ts”) to guide operating units in their dealings