The Securities and Futures Commission of Hong Kong (SFC) has frequently emphasized its commitment to combatting corporate fraud and misconduct in recent years. Continuing with these efforts, in July, the SFC issued a Statement on the Conduct and Duties of Directors when Considering Corporate Acquisition or Disposals (Statement). The Statement outlines recurring types of misconduct in relation to corporate acquisitions and disposals that have given rise to concerns and, in some cases, led to intervention by the SFC.
This article discusses recent enforcement trends and the repercussions of failing to comply with the SFC’s requirements. We also set out practical steps that listed companies and management can take to mitigate their risks.
RECENT ENFORCEMENT TRENDS
The SFC has shown no hesitation in taking action against suspected misconduct. It will directly intervene at an early stage of a transaction of a listed company. Its aim is to prevent harm to investors and to protect the integrity of our markets. The SFC has continued to actively seek disqualification orders in addition to other sanctions.
Earlier this year, the SFC commenced disqualification proceedings against two former executive directors (who were also the chairman and the chief executive officer, respectively) of a listed company in relation to a very substantial acquisition. The SFC alleged, among other things, that the two individuals breached their directors’ duties as the listed company was prevented from acquiring the target at a substantially lower price. The former chief executive officer was alleged to have failed to make “sufficient enquiries” about the relationships among the parties concerned in the acquisition (including the chairman).
In June 2019, the SFC commenced proceedings against a former company secretary (who also served as the chief financial officer and later as an executive director) for failing to discharge his duties as he did not “properly enquire” into certain withdrawals. The withdrawals were alleged to amount to a substantial portion of the proceeds from the company’s global offering of its shares. They were allegedly made without proper approval from the board of directors and did not serve any genuine commercial purpose.
There was no indication that the former company secretary benefitted from
those withdrawals.
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