Jurisdiction - Hong Kong
News
Hong Kong – Recent Enforcement Actions And Penalties.

17 June, 2015


Takeovers Panel Finds Chow Yei Ching, Oscar Chow Vee Tsung And Joseph Leung Wing Kwong In Breach Of The Takeovers Code.

 

The Takeovers Panel found that Chow Yei Ching (Dr. Chow), Oscar Chow Vee Tsung (Mr. Chow), Joseph Leung Wing Kwong and the late Nina Kung were acting in concert and in breach of Rule 26 of the Takeovers Code by acquiring shares in ENM Holdings Limited (ENM), a wholesale and retail fashion company. Dr. Chow was the chairman of Chevalier International Holdings Limited, Oscar Chow is the son of Dr. Chow and Joseph Leung was a director of ChinaChem. Dr. Chow and the late Ms. Kung, the chairperson of ChinaChem, were business partners. Ms. Kung began acquiring shares in ENM until her shareholdings reached 10 percent in 2000 (the threshold for disclosure of interest at that time). Subsequently, her interest rose to 34.9 percent, just below the mandatory general threshold at that time (35 percent). In 2001, Ms. Kung asked Dr. Chow and Mr. Chow to purchase BVI companies and transfer shares acquired by the Chows to these BVI companies. Additional purchases were made, and the shares were held by the BVI companies. The Takeovers Panel found that Ms. Kung, Dr. Chow and Mr. Chow, among others, were acting in concert with Ms. Kung, based on their past business relationships and their knowledge in Ms. Kung’s holdings in ENM. Mr. Leung, a director of ChinaChem, also was held to be a concert party and in breach of the Takeovers Code, as he played an active role as a member of the concert group in handling the reimbursement of funds from Ms. Kung to Dr. Chow. Based on their aggregate shareholdings, the Takeovers Panel found that a mandatory offer obligation had been triggered under Rule 26.

 

Market Misconduct Proceedings In Respect Of Alleged Insider Dealing In The Shares Of Warderly International Holdings Limited

 

The SFC alleges that a company secretary and a potential investor of Warderly International Holdings Limited (Warderly) were in breach of insider dealing rules, because they were aware that Warderly was in a perilous financial position when they sold the company’s shares in 2007 and, as a result, avoided a total loss of approximately HKD 12m. Warderly began to have cash flow problems in mid-2006 due to raw material costs and the settlement of a tax claim from the Inland Revenue Department. From July 2006 onward, Warderly experienced a number of material events concerning its financial position, including tightening of banking facilities and rescheduled payments. The SFC alleged that the company secretary and investor knew the financial crisis facing Warderly was material, highly price sensitive and not generally known to the market, and therefore they acted in breach of the insider dealing rules.

 

Disqualification Order Against Former Director

 

The Court of First Instance issued a disqualification order against Lam Yick Sing (Mr. Lam), a former executive director of Tack Fat Group International Limited (Tack Fat), from being a director or being involved in the management of any listed or unlisted corporation for a period of six years effective from 27 March 2015. Lam admitted that he (i) failed to ensure that Tack Fat gave its shareholders all the information they might reasonably expect and to comply with the disclosure requirements under the Listing Rules; (ii) abdicated his responsibilities as a director of a publicly listed company; (iii) breached his duties as a director in failing to exercise reasonable care and diligence in the management of Tack Fat, to act in good faith and the best interests of Tack Fat, and to implement a sound and prudent system of financial control so as to minimise the risk of misappropriation of company assets; and (iv) was partly responsible for the business or affairs of Tack Fat having been so conducted. Lam also admitted that he signed documents pledging the company’s and subsidiary’s assets to secure loans to related parties that were improperly hidden from shareholders. He further signed attendance sheets for two board meetings in which Tack Fat approved a sham transaction involving an undisclosed connected party in an acquisition of 40 percent of a Cambodian timber company. Lam admitted that he did not know anything about the vendor or other details of the transaction. He conceded that he did what he was told without any due exercise of independent commercial judgment and that he was not clear on the duties of disclosure by a listed company. In granting the order, the Honourable Mr. Justice Lam said a six-year disqualification period was appropriate because Lam was demonstrably lacking in diligence, competence and independence as a director, and had disregarded the responsibilities he owed to the company and those who had interests in it.

 

Disqualification And Compensation Orders Sought Against Former Chairman And Directors.

 

The SFC has commenced legal proceedings in the Court of First Instance against the former chairman and directors of Inno-Tech Holdings Limited (InnoTech) over alleged misconduct that caused the company to lose more than HKD 125m. The SFC alleges that Inno-Tech’s former chairman and director, Wong Yuen Yee, and three former directors, Robert Wong Yao Wing, Wong Kwok Sing and Lam Shiu San, breached their duties as directors in relation to the acquisitions and/or disposals of interests in three hotels and a gold mine on the mainland between 2007 and 2010, resulting in substantial and material losses to Inno-Tech. Specifically, the SFC alleges that the four former directors failed to (i) carry out adequate investigation into or due diligence prior to the acquisitions of the interests in the hotels and gold mine; (ii) negotiate the consideration for acquiring the interests in the hotels and gold mine; (iii) assess or obtain any independent assessment of whether an investment in the gold mine was commercially suitable or appropriate for Inno-Tech; (iv) assess the purchase price of the interests in the gold mine properly; (v) give adequate consideration to who would be appropriate to appoint as directors and/or to put in charge in respect of gold mining matters; and (vi) supervise the running of the gold mine properly. The SFC is seeking orders that the four former directors be disqualified as company directors and that Inno-Tech bring proceedings against the four for compensation or, alternatively, that the four be ordered to pay compensation to Inno-Tech directly.

 

Issuing Advertisement Without SFC’s Authorization.

 

The Court of Final Appeal (CFA) upheld an appeal by Pacific Sun Advisors Limited (Pacific Sun) and its director Andrew Pieter Mantel in relation to issuing advertisements to promote a collective investment scheme (CIS) without the authorization of the SFC. Pacific Sun and Mantel were charged in 2013 with issuing unauthorized advertisements to the public at large to subscribe for interests in a CIS in contravention of Section 103 of the SFO, which requires any advertisement, invitation or document containing an invitation to the public to acquire securities or interest in a CIS to be authorized by the SFC unless it falls within a specified statutory exclusion. Pacific Sun and Mantel were acquitted after successfully arguing that they could rely upon an exclusion contained in Section 103(3)(k), which applies if the securities are or are intended to be disposed of only to professional investors. The CFA has decided that the exclusion applies even if the intention to dispose of the securities or interests in a CIS only to professional investors is not expressed in the advertisement, invitation or document. The CFA made it clear that the burden of establishing that the exclusion applies rests on the defendant and not on the SFC and that the professional investor exemption would not apply if a person published an unauthorized offer to the public and sold the advertised securities to a retail investor. The ruling means advertisements of CISs that may be unsuitable for retail investors can be issued to the general public even if the issuer only intends to sell them to professional investors. It also means a contravention of Section 103, which occurs upon issue of a relevant unauthorized offer to the public, only can be established well after the offer to the public has been issued.


Skadden 

 

For further information, please contact:

 

Christopher Betts, Partner, Skadden
christopher.betts@skadden.com


Edward Lam, Partner, Skadden
edward.lam@skadden.com


Alec Tracy, Partner, Skadden
alec.tracy@skadden.com


Will Cai, Partner, Skadden
will.cai@skadden.com

 

Comments are closed.