MMT Continues Tough Sanctions for Breaches of Disclosure Requirements
On 5 April 2017, the Market Misconduct Tribunal (MMT) fined Mayer Holdings Limited (Mayer) and nine of Mayer's current and former senior executives a total of HKD 10.2 million for their breaches of the disclosure obligations under the Securities and Futures Ordinance (SFO) and disqualified them from being directors or being involved in the management of a listed corporation for up to 20 months. The relevant breaches included failure to disclose certain audit issues affecting Mayer and a delay of over three weeks in disclosing the auditors' resignation.
Implications for senior management / officers of listed companies
This recent MMT decision demonstrates the MMT's readiness to impose tough sanctions for breaches of the statutory corporate disclosure laws. Officers or senior management of listed companies are under statutory duties to take all reasonable measures to ensure that proper safeguards exist to prevent the breach of the disclosure requirements by the listed companies.
Earlier in February 2017, the MMT sanctioned another listed company, Yorkey Optical International (Cayman) Limited (Yorkey), its CEO and financial controller for their breaches of the disclosure requirements. The MMT found that there was a 13-week delay in Yorkey's disclosure of its material losses as a result of the reckless conduct of its officers. The company and the CEO were each fined HKD 1 million.
Compared to the Yorkey case, the MMT sanctioned a wider range of senior management in the Mayer case. The MMT fined a former executive director and the former company secretary (also the then financial controller) HKD 1.5 million each and disqualified them from being a director or being involved in the management of a listed corporation for 20 months. The MMT also fined the other executive directors and non-executive directors HKD 900,000 each and imposed a disqualification order for 12 months.
The MMT decision serves as a reminder that listed companies and their officers need to be mindful of their individual and collective responsibilities.
Background of the Mayer's case
Mayer was listed on the Main Board of The Stock Exchange of Hong Kong Limited and trading in its shares has been suspended since January 2012.
The inside information
Between April and August 2012, Mayer's auditors repeatedly raised with the management issues identified in the course of auditing Mayer's financial statements for the year ended 31 December 2011.
In view of the outstanding audit issues, in August 2012, the auditors indicated to the management that they would have to qualify the audit opinion if the outstanding audit issues were not resolved. No constructive response was provided by Mayer or its directors to the auditors to address those outstanding audit issues.
On 27 December 2012, Mayer received a resignation letter from the auditors which was addressed to the Board and the Audit Committee.
The MMT found that (amongst others) the auditors' resignation, the outstanding audit issues together with the potential qualified audit report were specific information regarding Mayer, price sensitive and not generally known to the public at the material time. The information would also have been viewed negatively by the investors and were of sufficient gravity to affect the share price of Mayer.
Breach of disclosure obligation
Mayer only announced the auditors' resignation together with brief details of the outstanding audit issues on 23 January 2013. The MMT considered that the delay exceeded what was reasonably practicable, and that Mayer was in breach of the disclosure requirement under section 307B of the SFO.
The MMT found that Mayer's officers had not taken any reasonable measure at any time to ensure that any proper safeguards exist to prevent the breach of the disclosure requirement by Mayer. Hence, each of the nine officers was in breach of the disclosure requirement under section 307G(2)(b) of the SFO.
Actions to consider
This MMT decision serves as a reminder for listed companies as well as their officers to review their internal polices and procedures in disclosing inside information. Good practices include:
- Take prompt action in relation to audit issues and deal with differences with auditors cautiously.
- Set up and maintain an efficient internal system to ensure that potentially price sensitive information would be promptly identified and escalated for the directors' consideration.
- Review existing written guidelines / internal control policies in relation to the compliance with disclosure of inside information. If necessary, seek professional advice in this regard.
- Provide training to senior management in relation to the statutory duty of disclosure obligation.
- Seek legal advice promptly and keep records of steps in seeking and considering the advice.
In light of the MMT's serious sanctions against the officers of Mayer and Yorkey in both cases, the MMT has sent a clear message that breaches of the disclosure obligation will be taken seriously. All senior management and officers of listed companies should take steps to ensure that they understand and discharge their personal responsibilities to comply with the disclosure requirements at all times.