24 August, 2012
Legal News & Analysis – Asia Pacific – Singapore – Dispute Resolution
Madhavan Peter v Public Prosecutor and other appeals [2012] SGHC 153
SUMMARY
Lawyer Peter Madhavan, the first independent director to be sentenced to imprisonment in Singapore for market misconduct, has had his convictions, sentences and disqualification order overturned by the High Court.
In a landmark decision, Chief Justice Chan Sek Keong gave some much needed guidance and clarification on the disclosure regime and obligations under the Securities and Futures Act and the Singapore Exchange Listing Manual.
Madhavan, the first appellant, was represented by Drew & Napier LLC lawyers Davinder Singh,SC, Wendell Wong, Jaikanth Shankar, Pardeep Singh Khosa, Vishal Harnal and Chan Yong Wei.
Johnson Chong, the second appellant, was represented by Colin Ng & Partners LLP lawyers Subramanian Pillai, Rasanthan Sothynathan and Luo Ling Ling.
Ong Seow Yong, the third appellant, was represented by Michael Hwang,SC (Michael Hwang Chambers), Thong Chee Kun and Istyana Putri Ibrahim (Rajah & Tann LLP).
BACKGROUND
Madhavan, Ong and Chong (collectively, the “Appellants”) were charged with and convicted of market misconduct under the Securities and Futures Act (“SFA”) by District Judge Liew Thiam Leng last year. The charges arose out of events that occurred in 2005 when Madhavan and Ong were independent directors, and Chong was an executive director, of air cargo firm Airocean Group Limited (“Airocean”).
The Appellants were each convicted of an offence under section 331 of the SFA read with section 199(c)(ii) of the SFA for consenting to Airocean making a statement that was misleading in a material particular and was likely to have the effect of stabilising the market price of Airocean’s shares (“Misleading Disclosure Charges”).
The statement in question was an announcement that Airocean released via the Singapore Exchange (“SGX”) on 25 November 2005. The District Judge held that the statement was misleading in a material particular as it omitted to disclose that Airocean’s Chief Executive Officer, Thomas Tay, was under investigation by the Corrupt Practices Investigation Bureau (“CPIB”) and that the CPIB investigations concerned two transactions involving two of Airocean’s subsidiaries.
According to the District Judge, the statement suggested that the CPIB investigations concerned other companies in the air cargo industry and not Airocean.
Madhavan and Chong were each also convicted of an offence under section 331 of the SFA read with section 203(2) of the SFA for consenting to Airocean’s reckless failure to notify the SGX of information which was likely to materially affect the price or value of Airocean’s shares as required by rule 703(1)(b) of the Singapore Exchange Listing Manual (“Listing Rules”) (“Non-disclosure Charges”).
According to the charges, Airocean recklessly failed to disclose the fact that Thomas Tay was questioned by the CPIB, was released on bail and that his passport was impounded (“Information”).
Chong was also convicted of three charges of insider trading under section 218 of the SFA (“Insider Trading Charges”).
On the Misleading Disclosure Charges, Chong was fined $180,000 while Ong was fined $170,000. Madhavan was sentenced to four months’ imprisonment. The District Judge took the view that Madhavan was the “most culpable” and had played an “active role” in the commission of the offence.
On the Non-disclosure Charges, Chong was fined $100,000 and Madhavan was fined $120,000.
On the Insider Trading Charges, Chong was sentenced to four months’ imprisonment.
All of the Appellants appealed against their convictions and sentences.
The facts of the case, along with a detailed discussion of the District Judge’s decision in Public Prosecutor v Chong Keng Ban @ Johnson Chong, Peter Madhavan, Ong Seow Yong [2011] SGDC 97, can be found in an earlier legal update on the Airocean case, which can be accessed here.
HIGH COURT’S DECISION
Chief Justice Chan Sek Keong (“Chan CJ”), sitting in the High Court, set aside the Appellants’ convictions on the Non-disclosure and Misleading Disclosure Charges.
While Chan CJ affirmed Chong’s convictions on the Insider Trading Charges, he imposed a fine of $200,000 in place of the custodial sentence.
Chan CJ held that the District Judge had erred in applying the same concept of materiality in convicting the Appellants of the different types of offences with which they were charged.
On the Non-disclosure Charges, Chan CJ held that there was insufficient reliable evidence to show beyond a reasonable doubt that the information in question was likely to materially affect the price or value of Airocean shares and that the District Judge erred in holding that Airocean was reckless in not disclosing the information.
On the Misleading Disclosure Charges, Chan CJ held that the Prosecution had failed to prove beyond reasonable doubt that Airocean’s statement on 25 November 2005 was misleading in a material particular and that it was likely to stabilise Airocean’s share price.
Concept of materiality under the SFA
While “materiality” is a common element running through the offences under sections 199, 203 and 218 of the SFA, Chan CJ held that a plain reading of those sections shows that Parliament and the SGX had prescribed different concepts of materiality for the purpose of the offences under sections 199 and 203 on the one hand, and the offence under section 218 on the other.
The Non-disclosure Charges under section 203 of the SFA involve the offence of intentionally or recklessly breaching rule 703(1)(b) of the Listing Rules.
According to Chan CJ, the word “material” in rule 703(1)(b) (which imposes an obligation on an issuer to disclose information that is likely to materially affect the price or value of its securities) refers to information that is likely to effect a significant change in the price or value of an issuer’s securities.
Chan CJ clarified that the concept of materiality for the Insider Trading Charges under section 216 of the SFA (which is expressly stated to apply only to section 218 of the SFA) refers to information which would, or would be likely to, influence persons who commonly invest in securities in deciding whether to subscribe for, buy or sell the securities concerned.
Chan CJ held that rule 703(1)(b) of the Listing Rules read with section 203 of the SFA has a narrower scope of operation than section 218 read with section 216 of the SFA.
On the Misleading Disclosure Charges, Chan CJ held that while the word “material” in section 199 of the SFA is not defined, it must be a reference to sufficiently important information which is likely to have the effect of raising, lowering, maintaining or stabilising the market price of securities.
According to Chan CJ, it follows from the nature of the offence under section 199 that the false or misleading information in question must, just as in the case of an offence under section 203 read with rule 703(1)(b) of the Listing Rules, be of sufficient importance to significantly affect the price or value of securities.
As section 216 of the SFA is not applicable to section 199 of the SFA, Chan CJ held that it was reasonable to infer that Parliament had intended section 199 (like section 203) to have a narrower scope than section 218 of the SFA.
Element of recklessness under the SFA
Chan CJ held that the word “recklessly” under section 203 of the SFA had the same meaning as the common law meaning of the word “reckless”, which was established by the House of Lords in R V G and another [2003] 4 All ER 765 in the context of s1 of the Criminal Damage Act 1971 (c 48) (UK). In that case, the House of Lords held that “reckless” conduct comprised two elements:
(a) the subjective awareness of a risk; and
(b) unreasonableness on the part of the offender in taking that risk.
Application to the facts
Non-disclosure Charges
Chan CJ overturned the convictions on the Non-disclosure Charges on the ground that the District Judge had erred in finding that the Prosecution had made out two essential elements of those charges, namely, that:
(a) the Information was likely to materially affect the price or value of Airocean shares; and
(b) Airocean was reckless in not disclosing the Information to the SGX under the Listing Rules.
On the element of materiality, Chan CJ held that there was insufficient reliable evidence to show beyond a reasonable doubt that the Information was likely to materially affect the price or value of Airocean’s shares. Chan CJ held that the District Judge had erred on three main grounds. According to Chan CJ:
(a) The District Judge misdirected himself on the law in relation to the concept of materiality which was applicable to the Non-disclosure Charges in that he failed to consider whether the Information was likely to materially affect the price of Airocean’s shares. Chan CJ held that the District Judge made no finding on an essential element of the Non-disclosure Charges and that that was a fundamental error.
(b) The District Judge erred in accepting the opinion of the Prosecution’s expert witness that the CPIB investigations could impair the future performance of Airocean because those investigations did not, as a matter of fact, affect the ability of Airocean’s chief executive officer to manage the company’s affairs.
(c) The District Judge erred in accepting the analysis of the Prosecution’s expert witness on the movements in Airocean’s share price after Airocean’s statements of 25 November 2005 and 2 December 2005 were made because the price movements over a reasonable period of time after those statements were made showed that they did not have a substantial effect on Airocean’s share price.
On the element of recklessness, Chan CJ held that the District Judge erred in holding that Airocean was reckless in not disclosing the Information. According to Chan CJ, the likely market impact of the Information was not clear and Airocean could not be held to be reckless given that it had acted on the advice of its external counsel, which was that disclosure of the Information was not necessary.
Chan CJ held that the directors of Airocean acted properly and prudently in seeking legal advice on whether to disclose the Information immediately after it became aware of the Information. Chan CJ also clarified that clients have no duty to question their lawyer’s advice as it would be unreasonable to expect or require them to do so, unless the advice is manifestly absurd, irrational or wrong.
In light of his findings on these two elements of the Non-disclosure Charges, Chan CJ took the view that he did not have to consider the other elements and set aside the convictions and sentences.
Misleading Disclosure Charges
Chan CJ overturned the convictions on the Misleading Disclosure Charges on the ground that the District Judge erred in finding that the Prosecution had made out two essential elements of those charges, namely, that:
(a) Airocean’s statements were misleading in a material particular; and
(b) Airocean’s statements were likely to have the effect of stabilising the market price of Airocean’s shares.
On the element of materiality, Chan CJ held that the District Judge erred in law for two reasons.
According to Chan CJ, the first error made by the District Judge was that His Honour had applied the test for materiality under section 216 of the SFA to the Misleading Disclosure Charges (which were charges under section 199(c) of the SFA). As stated above, Chan CJ held that the tests for materiality under section 216 of the SFA and section 199(c) of the SFA are (and are intended by Parliament and the SGX to be) different.
According to Chan CJ, the second error made by the District Judge was His Honour’s finding that the statements were misleading in a material particular. Chan CJ explained that the statements did in fact disclose that Airocean’s CEO was under investigation by the CPIB. Chan CJ was also of the view that the information that the CPIB investigations concerned two transactions involving Airocean’s subsidiaries was not a material particular. On that basis, Chan CJ held that any suggestion in the statements that the CPIB investigations concerned other companies in the air cargo industry and not Airocean (which according to the Prosecution distanced Airocean and its officers from investigations by the CPIB) was not materially misleading.
Chan CJ also held that the District Judge erred in finding that the statements were likely to have the effect of stabilising the price of Airocean’s shares. According to Chan CJ, that finding was based on the incorrect premise that the statements failed to disclose that Airocean’s CEO was being investigated by the CPIB.
On account of Chan CJ’s findings on those elements, Chan CJ did not consider it necessary to deal with the remaining elements of the Misleading Disclosure Charges.
Insider Trading Charges
Chan CJ held that the elements of the offence of insider trading under section 218 of the SFA had been made out.
One of the elements was whether Chong knew or ought reasonably to have known that if the Information was generally available, it might have a material effect on the price or value of the Airocean’s shares. According to Chan CJ, given that Chong was Airocean’s director and the Information was not generally available, Chong was presumed to have known that if the Information was generally available, it might have a material effect on the price or value of the Airocean’s shares.
On the facts, Chan CJ held that Chong had not rebutted that presumption. Chan CJ therefore upheld Chong’s conviction on the Insider Trading Charges. However, Chan CJ reduced the sentence that had been imposed on Chong by the District Judge.
COMMENT
Chan CJ’s decision brings some much needed clarity to the different concepts of materiality under the SFA and the Listing Rules as well as the disclosure obligations of directors of listed companies.
Chan CJ has clarified that directors are not under an obligation to disclose information that is merely trade-sensitive, ie information that may influence persons who commonly invest in securities in deciding whether to subscribe for, buy or sell securities. The obligation is to disclose information that is materially price-sensitive in the sense that the information must be likely to effect a significant change in the price or value of an issuer’s securities. As Chan CJ held, this ensures that “issuers are not unduly burdened by having to disclose every kind of information, however trivial, that may be likely to have an effect – but not a material effect – on the price of their securities”. The key consideration is the materiality of the information in question.
In situations where the likely market impact of information is unclear and a board is uncertain as to whether disclosure of the information is required, it is not unreasonable, and would in fact be prudent, for a board to take independent legal advice on the question of whether disclosure should be made. In this connection, Chan CJ accepted Madhavan’s argument that it was not unreasonable for Airocean to be cautious and to seek independent legal advice as to whether disclosure should be made as a misjudged disclosure can be as detrimental to the interests of the company and the shareholders as material non-disclosure.
In this context, Chan CJ held that a board is not under any obligation to question the legal advice that it receives unless such advice is manifestly absurd, irrational or wrong. That being said, Chan CJ’s decision should not be taken to mean that boards can simply refer the matter to lawyers and wash their hands of the matter. The board is required to exercise independent judgment at every step of the way, ie first, in determining whether disclosure is required having regard to the nature of the information and the circumstances and facts of the particular case, second, in determining whether legal advice should be taken, third, in determining whether the advice that is obtained is manifestly absurd, irrational or wrong and should be disregarded and whether a second opinion should be sought and fourth, whether disclosure should be made having regard to any legal advice that has been sought and obtained and in all the circumstances of the particular case.
