Jurisdiction - Hong Kong
Hong Kong – Enforcement News.

19 Juy, 2012

Hontex ordered to Make HK$1 billion buy-back offer over untrue IPo Prospectus
In June 2012, the Court of First Instance granted orders sought by the SFC in its proceedings against Hontex International Holdings Company Limited (Hontex) to make a repurchase offer to investors who subscribed for shares in the initial public offering or purchased the company’s shares in the secondary market. This is the first order of this kind under section 213 of the SFO.
The orders require Hontex to pay a further sum of HK$197,755,503 into the Court within 28 days, adding to the amount of HK$832,244,497 already frozen under the interim orders, to convene a shareholders’ meeting to approve a resolution and then, upon approval, to take steps to repurchase the shares allotted to or purchased by approximately 7,700 public shareholders who are currently holding Hontex shares. 
The repurchase price will be HK$2.06 per share, being the closing price of the shares when trading was suspended by the Exchange on March 30, 2010 at the direction of the SFC. The repurchase scheme will be managed by administrators appointed by the Court. The repurchase offer will not be made to the controlling shareholders who have agreed to abstain from voting upon the repurchase resolution.
Hontex has acknowledged that the amounts stated in its IPO prospectus in respect of its turnover for the three years ended December 31, 2008 were materially false and misleading, as were its profit before tax, the value of its cash and cash equivalents and the number of franchise stores.
License of Mega Capital’s Responsible Officer Revoked
Mega Capital was the sole sponsor for the listing application of Hontex, and Hong was one of the two responsible officers and sponsor principals in charge of the supervision of Mega Capital’s transaction team on Hontex’s listing. Mega Capital’s sponsor license was revoked in April 2012. For the SFC’s main findings on Mega Capital and other key SFO enforcement actions to date, please click here
The SFC investigation found that Hong failed to discharge his duties as a sponsor principal and a responsible officer. 
The SFC’s main findings were as follows:
1. Refusal to accept responsibilities 
Hong denied that he was in charge of the supervision of Mega Capital’s transaction team on Hontex’s listing application and tried to shift the responsibility to another responsible officer and sponsor principal of Mega Capital, Mr. X. Hong claimed that he was the managing director overseeing different departments of Mega Capital and it was Mr. X who was in charge of Hontex’s listing application. Hong did not seem to realize that he and Mr. X were jointly and severally liable in discharging their roles as sponsor principals.
2. Supervisory failures
Although members of Mega Capital’s transaction team confirmed that Hong was involved in Mega Capital’s sponsorship work on Hontex’s listing application and gave instructions to them from time to time, the evidence revealed that Hong failed to properly and adequately supervise the transaction team. 
For example, while Hong was in a position to review the work of the transaction team and oversee the progress of the listing through emails that were copied to him, he admitted that he did not read most of the emails relating to Hontex’s listing application. 
Furthermore, Hong did not review the due diligence questionnaires completed by the transaction team with Hontex’s major customers and suppliers. Consequently, Hong did not realize that material information (like transaction figures with Hontex) was missing from most of the due diligence questionnaires, and he failed to instruct the transaction team to follow up on the missing information. 
3. breach of sponsor’s undertaking and filing untrue declaration with the Exchange
As sponsor principals for Hontex’s listing application, Hong and Mr. X jointly signed and submitted the sponsor’s undertaking and declaration to the Exchange, respectively, confirming that Mega Capital had made reasonable due diligence inquiries, that all information provided to the Exchange was true in all material respects and that no material information was omitted. 
However, Hong did not take reasonable steps to ensure that the transaction team had conducted due diligence in accordance with the requirements of Practice Note 21; instead, he simply relied on Mr. X and the transaction team to ensure the quality of the due diligence work without performing any quality assurance role himself. The SFC found that Hong had failed to supervise the execution and ensure the adequacy of the due diligence inquiries performed by the transaction team of Mega Capital. 
False or Misleading Announcements
In June, the SFC commenced criminal proceedings against PME Group Ltd (PME), a Hong Kong-listed company, and its director in relation to allegations that PME made false or misleading stock exchange announcements.
Each was charged with three counts under section 384 of the SFO, which makes it an offence for a person to provide false or misleading information to the Exchange. The maximum penalties under section 384 of the SFO are three years jail and/or a HK$1 million fine.
Between February 11 and 28, 2008, PME’s closing share price rose by approximately 136% with increased turnover. Following queries made by the Exchange, PME made three announcements which said that it knew of no negotiations or agreements which were disclosable to the market nor were its directors aware of any pricesensitive matter. 
The SFC alleges that:
  1.  these announcements were false and misleading because PME was simultaneously taking steps to acquire control of a private entity holding approximately 50% of another Hong Kong-listed company, with a market value of about HK$145 million; and  
  2. this was a material acquisition for PME and ought to have been disclosed in response to the inquiries made by the Exchange in light of the substantial movement in the share price of PME.
Jailed and Fined for Insider Dealing
In June 2012, the Court of Final Appeal (CFA) reinstated, in part, the original jail sentence and fine against Mr. Pablo Chan Pak Hoe who was convicted of one count of insider dealing. 
Chan was found guilty of insider dealing in shares of Universe International Holdings Ltd (Universe) between May 2 and June 19, 2008, when he acted as a representative of the controlling shareholder in a proposed takeover of Universe by another company. Chan used inside information about the takeover negotiations to buy Universe shares. He sold the shares at a 40% higher price once the negotiations were announced. 
The CFA reinstated the HK$120,000 fine (which represented the profit from insider dealing) and the original four-month jail sentence with a reduction of one month after taking into account that Chan had already completed 240 hours of community service. 
The CFA agreed that, save for exceptional circumstances, the appropriate sentence for insider dealing should be immediate imprisonment coupled with a fine which, at the very least, removes a defendant’s unjust profits. 
Failure to Make general offer under the Takeovers Code
In May 2012, the SFC took disciplinary action against Capital VC Limited (Capital VC) and Mr. Yau Chung Hong in relation to their breach of Rule 26.1 of the Takeovers Code. Yau was an executive director, a substantial shareholder and a member of the investment committee of Capital VC.
Yau and Capital VC failed to make a general offer in respect of Longlife Group Holdings Limited (Longlife), a company listed on the Growth Enterprise Market, after having increased their collective shareholding in Longlife to 30.19% on June 10, 2011, thereby triggering a mandatory general offer obligation under Rule 26.1 of the Takeovers Code. 
At all material times Yau managed two investment accounts, one for Capital VC and one for his personal investments. He was the sole decision-maker in executing trades in Longlife shares for Capital VC’s and for his own account. He claimed that he had acquired excessive Longlife shares because of wrong calculations. While he was aware of the need to keep the collective shareholding of Capital VC and himself in Longlife below 30%, there was no evidence that he had made any serious efforts to put in place effective compliance procedures. Yau’s actions directly led to the breach of Rule 26.1 of the Takeovers Code.
Capital VC and its investment committee relied solely on Yau to monitor his and Capital VC’s relevant holdings in Longlife. Without adequate internal policies and procedures to ensure compliance with applicable regulatory requirements, including the Takeovers Code, Capital VC also bore responsibility for Yau’s action and the consequent breach of the Takeovers Code.
Yau was imposed a Cold Shoulder Order denying him direct or indirect access to the Hong Kong securities markets for 18 months until November 2013. The SFC also publicly censured Yau and Capital VC in relation to their conduct in the matter. 


For further information, please contact:
Venantius Tan, Partner, Morrison & Foerster


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