In a landmark decision handed down by the Singapore High Court, an independent director's conviction for market misconduct was overturned. As a result of this case, company directors are no longer in the dark about their disclosure obligations and duties under the Securities and Futures Act. Melissa Russell and Victoria Macgregor of Clyde & Co LLP Singapore (with assistance from Clasis LLC) shed light on the requisite thresholds that need to be crossed in order to impute liability upon independent directors.
The background
The recent decision on appeal to the Singapore High Court in Madhavan Peter v Public Prosecutor [2012] SGHC 153, decided by Judge Chan Sek Keong, highlights Directors' and Officers' disclosure obligations and illustrates the possible serious consequences of failing to fulfil those duties.
Airocean Group Ltd was a holding company for a number of air-cargo logistics companies. Its four directors were Thomas Tay (Tay) as CEO, Chong Keng Ban (Chong) as COO, Ong Seow Yong (Ong) and Peter Madhavan (Madhavan).
In early September 2005, Tay was questioned by the Corrupt Practices Investigation Bureau (CPIB) in relation to a suspected bribe paid to secure business for two of Airocean's subsidiary companies. Tay was later arrested, released on bail and his passport was impounded. All of the directors knew of the CPIB investigation. In late September, Chong sold two million shares in Airocean.
The Straits Times published an article about CPIB's investigation of Tay in November 2005. This prompted the directors of Airocean to release an announcement, via SGXNET, in an attempt to clarify the newspaper article. However, the announcement mentioned only CPIB's investigation of Tay and did not mention the CPIB's investigation of the two Airocean subsidiaries. After receiving advice from the Singapore Exchange, Airocean released a further announcement, clarifying that three of its directors had been questioned by the CPIB about the alleged bribe. But this statement did not mention that the CPIB questioned the directors of two of Airocean's subsidiaries. On 5 December 2005, Airocean's share price fell by 17.4 percent.
Test of materiality
The Court considered the legal test of materiality under the Securities and Futures Act (SFA). The SFA prescribes the continuous disclosure obligations and also regulates insider trading. The Court held that:
a) Failure to disclose (alleged breach of Rule 703(1)(b) of the Singapore Exchange Securities Trading Limited Manual read with s203(2) of SFA1)
A company listed on the Singapore Exchange must disclose information which would be likely to materially affect the price or value of its shares. Intentional or recklessly withholding such information will constitute an offence of non-disclosure under the SFA. In relation to this offence, the Court decided that materiality depended upon whether the information was "price sensitive information." The court looked at whether the information impacted the value of the shares. This was to be determined by expert evidence and actual evidence from the market and it had a high standard of proof.
b) Providing mis-leading information (s199(c)(iii) read with s331(1) of SFA)
A Singapore company is prohibited from making any statement that is misleading in "a material particular" and its likely effect is to stabilise the company's share price2. The Court held that the focus of this offence is 'on the price impact of false or misleading statements'3. Again, the Court conceptualised information as material if it is "price sensitive information".
c) Committing insider trading (s218(a) of SFA)
It is an offence for a person connected with a company to sell or buy shares in that company while in possession of information which is not generally available to the public but, if it were generally available:
- A reasonable person would expect such information to have a material effect on the company's share price
- The information would, or would be likely to, influence an investor's decision to buy or sell4
This is known as "trade sensitive information".
Trade sensitive
In summary, the Court held that the information was "trade sensitive" but not "materially price sensitive". As a result of the Court's decision, Madhaven, Chong and Ong were acquitted of misleading and non-disclosure offences and their sentences (including imprisonment up to 12 months and fines of SG$180,000) (US$147,263) were overturned. Chong's conviction on insider trading was upheld. Chong was disqualified from acting as a director for five years, while his custodial sentence was reduced to a fine of SG$280,000 (US$229,076.)
As the two different materiality tests show, information must meet a higher threshold for it to be "price" rather than "trade sensitive information"; information may influence an investor to buy or sell but it may not significantly affect the share price. The reason for the lower threshold in respect of "trade sensitive information" is that the level playing field of investors is only upset if investors, in possession of "trade sensitive information", act upon it.
The Court's finding
In defence of the allegation that the directors acted recklessly in issuing the announcements, the directors said that they relied on legal advice but the Public Prosecutor argued such advice was flawed and should have been questioned. The Court held that directors were not reckless in failing to question their lawyer's advice unless it could be shown that the advice was manifestly absurd, irrational or wrong. In our view, the Court has attempted to redress the perceived onerous obligations that directors and officers owe under the SFA and other company legislation. Directors and officers should remain vigilant as we anticipate an increase in similar prosecutions/ investigations by the CPIB.
This article was first published in Asian-MENA Counsel.
Footnotes
1 Chapter 289, 2002 Revised Edition
2 s199 of SFA
3 per Chan Sek Keong CJ, paragraph 45
4 s203 of SFA read with s216 SFA
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
