DIRECTORS OF AIROCEAN CLEARED OF FAILING TO MAKE TIMELY DISCLOSURE AND OF MAKING A MISLEADING ANNOUNCEMENT

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1 AUGUST DIRECTORS OF AIROCEAN CLEARED OF FAILING TO MAKE TIMELY DISCLOSURE AND OF MAKING A MISLEADING ANNOUNCEMENT The Singapore High Court recently issued its decision in the appeal of Madhavan Peter v PP [2012] SGHC 153. In brief, the three accused directors were acquitted on appeal of the charges of breaching sections 199 (false or misleading statements) and 203 (continuous disclosure) of the Securities and Futures Act ( SFA ). Chan Sek Keong CJ held that the evidence did not show that the information omitted or undisclosed was materially price-sensitive. As the charges failed on this ground, he did not consider whether the non-executive directors had consented to the non-disclosure / release of the misleading announcement. The conviction against the Chief Operating Officer ( COO ) of Airocean Group Limited ( Airocean ) for insider trading was upheld but the custodial sentence imposed by the District Court was reduced to a fine. However, the period of his disqualification from acting as a director was sustained at the original five years. This Update takes a look at the judgement and its impact on directors duties in respect of corporate announcements. Legal Background The Law on Continuous Disclosure Rule 703 of the Listing Manual Rule 703 of the Listing Manual ( LM ) requires a company listed on the Main Board of the Singapore Exchange ( SGX ) to announce any information known to it concerning it or any of its subsidiaries or associated companies which: is necessary to avoid the establishment of a false market in the issuer s securities; or would be likely to materially affect the price or value of its securities. Appendix 7.1 of the LM elaborates on Rule 703 and sets out SGX s Corporate Disclosure Policy. Section 203 of the SFA Section 203 of the SFA makes it an offence for a listed company to intentionally, recklessly, or negligently fail to notify the securities exchange on which it is listed SGX in this case of such information as is required to be disclosed by, among other things,

2 AUGUST the exchange s listing rules. For criminal penalties to be attracted, the failure must be intentional or reckless. Section 331 of the SFA Section 331 of the SFA extends liability under section 203 to an officer of the company if the offence was committed with his consent or connivance or the offence is attributable to any neglect on his part. For the purposes of section 331, an officer would include a director, member of the committee of management, chief executive, manager, secretary or other similar officer of the body, and includes a person purporting to act in any such capacity. The penalties that may be imposed for a breach of section 203 are a fine not exceeding S$250,000, or imprisonment for a term not exceeding seven years, or to both. It follows that failure to comply with the obligation under the LM to announce immediately any material price-sensitive information (where the limited exceptions under the LM do not apply to excuse such failure) may amount to a breach of section 203 of the SFA. The Law on Making a False Public Announcement Section 199(c)(ii) of the SFA Section 199(c)(ii) of the SFA makes it an offence for a person to make a statement or disseminate information that is false or misleading in a material particular and is likely to have the effect of, among other things, raising, lowering, maintaining, or stabilising the market price of securities; if, when he makes the statement or disseminates the information he, among other things, knows or ought reasonably to have known that the statement or information is false or misleading in a material particular. As with section 203, liability is extended to an officer of the company under section 331 if the offence was committed with his consent or connivance or the offence is attributable to any neglect on his part. Disqualification from Acting as a Director Section 154 of the Companies Act The prosecution had also sought disqualification orders against each of the directors charged. Such an order may be made by a court under section 154 of the Companies Act ( CA ) where a person is convicted in Singapore of, among other things, any offence in connection with the formation or management of a corporation or of an offence under section 157. It prohibits a person from acting as a director of a company and from taking

3 AUGUST part, whether directly or indirectly, in the management of a company. The maximum period of the disqualification that may be ordered is five years. The Events Relating to the Announcements Board members of Airocean In 2005, the board of directors ( Board ) of Airocean consisted of three executive directors and three non-executive independent directors. The three executive directors were Thomas Tay ( Tay ), its Chief Executive Officer ( CEO ), Johnson Chong ( Chong ), its COO, and Paul Dunn ( Dunn ). The three non-executive independent directors were Ong Chaw Ping ( CP Ong ), its Chairman, Peter Madhavan ( Madhavan ), and Ong Seow Yong ( SY Ong ). Tay brought in for questioning Tay arrested under the Prevention of Corruption Act The key dates and events for the case are as follows: 6 September 2005: Tay was brought in for questioning by the Corrupt Practices Investigation Bureau ( CPIB ) in relation to two transactions, each involving a subsidiary of Airocean. Tay was suspected of having given bribes in order to secure business for both subsidiaries. Also brought in for questioning on that day were officers of the two Airocean subsidiaries. Chong was informed that Tay and the two officers had been picked up by the CPIB for questioning. He later informed Madhavan about them. 7 September 2005: Chong called for an urgent board meeting to discuss the situation, and to decide whether Airocean had to make an announcement. The directors at the meeting SY Ong, Madhavan, and Chong decided to seek legal advice, and Madhavan and Chong met with legal counsel ( Counsel ) later that evening. That night, Tay was arrested under section 6(b) of the Prevention of Corruption Act ( PCA ), which makes bribery a criminal offence. He was released on bail, and his passport was impounded. Tay was given a copy of the bail bond, which stated that it was executed when persons were arrested by the CPIB, and that Tay had been arrested for an offence under section 6(b) of the PCA. Tay met with Madhavan and Chong at his home. The Court found that, at this meeting, Tay specifically informed both Madhavan and Chong that he had been questioned on whether he had bribed officers of two companies in relation to transactions involving two of Airocean s subsidiaries, and that he was out on bail. Tay handed them his copy of the bail bond and they both read it. 8 September 2005: A board meeting was held to decide on the next course of action. Tay and the accused officers of Airocean s subsidiaries were present. Tay informed the Board

4 AUGUST Board decides announcement not required The 25 November announcement The 2 December announcement as to why he had been questioned by the CPIB. He also informed the Board that his passport had been impounded, and that he had been advised that in the worst-case scenario, he might be charged with bribery. At the end of the meeting, the Board decided that technically no action needs to be taken. Legal advice from Counsel obtained around this time was also that no disclosure needed to be made at this stage as the information and evidence available was still vague. 25 November 2005: The Straits Times published an article entitled Airocean s chief executive Thomas Tay under CPIB probe. The Issuer Regulation Unit of the SGX called Airocean and informed it that it needed to issue an announcement clarifying the article. The announcement that was made later that day stated, among other things, that [Airocean] learnt of the CPIB investigations with regard to practices of some other companies in the Aircargo Industry sometime in early September 2005 when [its] CEO Mr Thomas Tay was called for an interview by the CPIB ( 25 November announcement ). 28 November December 2005: The SGX requested further clarification and there were various exchanges between members of the Board and the SGX. On 1 December 2005, the SGX requested Airocean to halt trading. 2 December 2005: The Commercial Affairs Department commenced investigations against Airocean for alleged contraventions of the disclosure provisions in the SFA and raided Airocean s offices. Airocean released an announcement ( 2 December announcement ) stating, among other things, that, the Board of Directors, at the request of SGX, wishes to clarify that Mr Thomas Tay and three (3) officers of [Airocean s] subsidiaries were interviewed by the [CPIB] in September The interview concerned two (2) transactions involving [Airocean s] subsidiaries with other companies in the aircargo industry ( the Information ). The District Court Decision Sentences imposed by the District Court The District Court had found against all three directors on each count, and had imposed the following sentences: In respect of the charge under section 203 of the SFA for failure to initially disclose the CPIB investigation of Tay: o Chong: Fine of S$100,000 in default 10 months imprisonment; and o Madhavan: Fine of S$120,000 in default 12 months imprisonment. In respect of the charge under section 199 of the SFA for the

5 AUGUST November announcement: o Chong: Fine of S$180,000 in default 18 months imprisonment; o o Madhavan: 4 months imprisonment; and SY Ong: Fine of S$170,000 in default 17 months imprisonment. Chong had also been charged with insider trading for trading in Airocean shares on three separate occasions. The District Court had imposed a sentence of two months imprisonment under each of the three charges for insider trading, with two of the imprisonment sentences to run consecuti vely, making a total of four months imprisonment Disqualification periods imposed by the District Court As a result of the convictions of each of the accused, the District Court imposed the following periods of disqualification on each: Chong: Disqualified for 5 years; Madhavan: Disqualified for 5 years; and SY Ong: Disqualified for 2 years. The directors appealed to the High Court against their convictions. The High Court Decision As noted above, Chan Sek Keong CJ in the High Court acquitted all the three directors of the charges of breaching sections 199 (false or misleading statements) and 203 (continuous disclosure) of the SFA. However, the conviction against Chong for insider trading was upheld although the custodial sentence was reduced to a fine. However, the period of disqualification from acting as a director was sustained at the original five years. Test of Materiality under Sections 199 and 203 of the SFA A key aspect of the judgement was the Court s holding that the test for materiality under sections 199 and 203 of the SFA is different from the test of materiality under section 218 read with section 216 of the SFA (insider trading). Trade-sensitive information Section 218 of the SFA makes insider trading an offence. It defines insider trading as transacting in the securities of a corporation while in possession of information about that corporation that is not generally available but which a reasonable person would expect to have a material effect on the price or value of securities of that corporation. Section 216 stipulates that

6 AUGUST for the purposes of section 218 (and the other provisions on insider trading), a reasonable person would be taken to expect information to have a material effect on the price or value of securities if the information would, or would be likely to, influence persons who commonly invest in securities in deciding whether or not to subscribe for, buy, or sell the first-mentioned securities. Accordingly, then, where a charge is brought against a person for insider trading under section 218 read with section 216, the test for determining whether the information in his possession is caught by those sections is whether it would likely influence an investor (which the Court defined as trade-sensitive information ). Price-sensitive information The Court contrasted this test with those in sections 199 and 203 (read with rule 703 of the LM). Section 199 refers to information that is false or misleading in a material particular and, the Court opined that in this context, it must mean information that is sufficiently important to be likely to, among other things, have the effect of raising, lowering, maintaining or stabilising the market price of securities. Similarly, Rule 703 refers to information that would be likely to materially affect the price or value of securities. The Court then explained that for the purposes of both provisions, the word material must necessarily refer to information that is likely to effect a significant change in the price or value of an issuer s securities (which the Court defined as price-sensitive information ). Trade-sensitive information may not be pricesensitive For information to fall under sections 199 and 203, it must therefore meet a higher threshold than that imposed for information falling under section 216 of the SFA: information that is likely to influence an investor, i.e. trade sensitive information, may not also be information that is likely to effect a significant change in the price of securities, i.e. being price-sensitive. As the Court noted in a later part of its judgement, one investor may be influenced by a piece of information to sell his shares while another investor may decide to buy those shares, with the result that over a period of time, there is no material effect on share price. Different thresholds of materiality The Court noted that this difference in the test of materiality in sections 199 and 203 on the one hand, and section 218 read with section 216 on the other, was due to the fact that if trade-sensitive information is not disclosed to the market, no investor can be said to be worse off provided investors in possession of such trade - sensitive information do not trade in securities using such information. Criminalising insider trading based on trade-sensitive information would still be consistent with the policy of maintaining

7 AUGUST a level playing field between common investors and insiders as the playing field would only be made uneven if insiders in possession of trade-sensitive information actually trade in securities using such information. Charge of Misleading Non-Disclosure The directors were acquitted of the charge of failing to make timely disclosure of materially price-sensitive information contrary to section 203 on two grounds: The evidence was insufficient to show beyond reasonable doubt that the undisclosed information was material for the purposes of section 203. They had not acted recklessly in deciding not to make an announcement. Expert based his view on test of trade-sensitivity Actual price movements indicated little impact On the ground of insufficiency of evidence as to the materiality of the undisclosed Information, the Court noted: The prosecution expert had concluded that the undisclosed Information was price-sensitive using the test of whether it would, or would be likely to, influence persons who commonly invest in securities in deciding whether to subscribe for, buy or sell [Airocean shares]. He did not, however, consider whether the Information would be likely to have a significant effect on share price. Accordingly, the report could not be relied on as evidence of whether the undisclosed Information was materially price-sensitive for the purposes of section 203 read with rule 703. The expert had also determined that the Information was price-sensitive based on the hypothesis that investors would have perceived Tay s ability to run Airocean as being impaired as a result of the investigation. On the contrary, however, the actual facts showed that Tay was released on bail, that he was able to travel to Shanghai between 8 September and 2 December 2005, and that Airocean had an increased turnover in The undisclosed Information did not, in fact, have a significant effect on the share price when it was eventually disclosed. The Court here looked at evidence of price movements over a period of two weeks, and not just on the first trading day after the 2 December announcement. While the share price dropped by 12% on the first day after disclosure, it recovered the following day. Price movements over the subsequent two - week period also showed that the share price fluctuated within a very narrow band of prices from S$0.095 to S$0.125, at times reaching highs equivalent to the price of the shares

8 AUGUST before disclosure. There was therefore a reasonable doubt that the Information had a material effect on Airocean s share price when viewed over a reasonable period of time. Disclosure would have included mitigating factors The Court also made the comment that, while the point was not argued, another reason why the Information might not have had a material effect on Airocean s share price was that had full disclosure of the information been made, it would also have bee n accompanied by disclosure of extenuating or mitigating facts that would have had the effect of neutralising the negative impact of the Information by reassuring Airocean s shareholders that Tay remained in charge of the company. No duty to query counsel s advice On the ground that the directors had not acted recklessly, the Court noted: The directors had not known whether the Information was material for the purposes of rule 703 of the LM, and had therefore sought legal advice to ascertain whether disclosure should be made. In doing so, they had acted properly and prudently in seeking legal advice on whether or not to disclose what they knew. The fact that the directors had not queried Counsel about the advice did not mean that they had been reckless to rely on it. Where a client relies on legal advice from his lawyer without asking the latter for the reasons for his advice, if the legal advice turns out to be wrong in law, it may cause the client considerable problems or even financial ruin, but that would be a consequence of the legal advice being bad advice, and not of the client having deliberately taken the risk of the legal advice being incorrect. Indeed, clients have no duty to question their lawyer s advice and it would not be reasonable to expect or require them to do so, unless the advice is manifestly absurd, irrational or wrong. Useful to see how market reacted on other occasions The Court also made certain observations on the nature of information which would be likely to have a m aterial effect on the price or value of a company s securities. It noted that while some kinds of information are so damaging to the company that, as a matter of common sense, it is bound to materially affect the price of the company s securities (for example, information that a company has lost its only valuable franchise or has lost the bulk of its capital), the likely market impact of other kinds of information may be less clear. It commented that in evaluating and predicting the market impact of such information, it may be useful to look at how the market had reacted to similar information in the past. Securities analysts and other experts in studying the reaction of

9 AUGUST investors to certain kinds of favourable or unfavourable news about a company s securities or the stock market as a whole may also be of assistance. Charge of Making a Misleading Statement As noted, the two non-executive directors were also acquitted of the charge of making a statement that was misleading in a material particular contrary to section 199 of the SFA. District Court conflated two separate particulars The Court undertook a close analysis of what the material and misleading particular was in this case. It noted that the District Court had conflated two particulars: that there had been an investigation by the CPIB of Tay, and that the investigations concerned two subsidiaries of Airocean. However, the 25 November announcement had only omitted to set out the information about the two subsidiaries because the fact of Tay s investigation by the CPIB had not been omitted from the announcement, particularly when read in context as a clarification of the Straits Times article of 25 November Omitted particular not materially misleading The Court then focused on that omitted particular: that the investigations concerned two subsidiaries of Airocean. It held that there was no evidence that the omitted particular in itself (that is, without reference to Tay s investigation, which had not been omitted from the 25 November announcement) had a material impact on the share price of Airocean. On the contrary, the evidence on the share price of Airocean (that is, its price movements in the two weeks after disclosure) showed otherwise. The Court concluded that while the omission meant the 25 November announcement was misleading in a particular, it was not materially misleading for the purposes of section 199. Insider Trading Court looked at immediate sell-off for insider trading The Court s decision as regards the charge of insider trading provides a useful contrast to how the test of materiality under section 218 read with section 216 (trade-sensitive information) differs from the test under sections 199 and 203 (price-sensitive information). In upholding the charge of insider trading, the Court looked to the immediate market reaction on the day of disclosure. It noted that the evidence showed that there was an initial sell-off of shares when the information was eventually disclosed. The volume of trading in Airocean shares peaked on each of the days when announcements were made. There were also clear and marked downward price movements in the immediate aftermath.

10 AUGUST This was henc e sufficient to meet the lower threshold of trade - sensitive Information: investors had indeed been influenced to sell their shares in Airocean. The Court emphasised that the subsequent recovery of the share price after that date indicated that the information had not materially impacted share price even if it had influenced the immediate reactions of shareholders. Trading was not so serious as to warrant imprisonment Sale was not to avoid a loss Actual loss avoided not that great However, while the charge of insider trading was made out, the Court further held that the District Judge should not have imposed a custodial sentence that was out of line with prior sentencing precedent. It noted that insider trading offences may be committed in many ways, for different ends, and with different consequences to investors and the securities market. In this case, Chong s insider trading did not demonstrate the level of gravity that warranted a custodial sentence: Chong had not sold the Airocean shares in order to avoid a loss. This could be seen from the fact that he did not sell the shares immediately or shortly after he learnt of Tay s arrest. Instead, he delayed his trades for almost three weeks in order to allow things to settle down. Moreover, Counsel s advice that no disclosure of the CPIB investigations was necessary as at September 2005 would have been in his mind when he sold those shares. The loss avoided by Chong was not as great as had been determined by the District Judge. The actual fall in prices on 25 November and on 2 December could be attributed to other information impacting the future prospects of Airocean, including disclosure of a failed effort to enter into a joint venture as well as disclosure of the CAD investigation into Airocean itself. Test of substantial likelihood questioned It is also noteworthy that the High Court also considered the decision of the Court of Appeal in Lew Chee Fai Kevin v Monetary Authority of Singapore [2012] 2 SLR 913 (for more information on this case, please see LawWatch: Corporate Governance Edition, May 2012 ) where it was held that section 216 required that there be a substantial likelihood that an investor will be influenced by the information to buy or sell the shares. The Court commented that this resulted in an additional requirement of substantiality being read into the language of section 216, and accordingly, the holding should be reconsidered. If this view is accepted by a later Court of Appeal, it will mean that the threshold for prohibited information for the purposes of the provisions against insider trading will be lowered.

11 AUGUST The Court therefore imposed fines of S$100,000, S$50,000, and S$50,000 on Chong with respect to the three insider trading charges brought against him. It also upheld the period of disqualification from acting as a director or being involved in the management of any company for a period of five years. If you would like information on this or any other area of law, you may wish to contact the partner at WongPartnership that you normally deal with or contact any of the following partners: Annabelle Yip Joint Head - Corporate Governance & Compliance Practice DID: Joy Tan Joint Head - Corporate Governance & Compliance Practice DID:

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