The Securities and Futures Commission (“SFC”) commenced disclosure proceedings against Fujikon Industrial Holdings Limited (“Fujikon”) and two of its senior management officers in the Market Misconduct Tribunal (“MMT”) on 28 March 2018, for breaches of disclosure requirements under the Securities and Futures Ordinance (Cap. 571) (the “SFO”).
Fujikon is a company listed on the Main Board of the Stock Exchange of Hong Kong. Fujikon and its subsidiaries (collectively the “Group”) were principally engaged in the design, manufacture, marketing and trading of electro-acoustic products and other electronic products. Two other parties sanctioned in this case were Mr Johnny Yeung and Ms Dorothy Chow, the Chief Executive Officer and the Chief Financial Officer/Company Secretary of Fujikon respectively. Both of them were executive directors of Fujikon.
Beats Electronics International Limited (“Beats”) was one of the major customers of Fujikon. For the financial years ended 31 March 2013 and 31 March 2014 (“FY2013” and “FY2014”), Fujikon manufactured only one product for Beats, namely, the wireless 1.5 headphone (the “Headphone”). Orders for the manufacturing of the Headphone alone made up to more than 10% of total revenue of Fujikon in FY2013 and FY 2014.
On 12 April 2014, Beats notified Fujikon Industrial Company Limited, a wholly-owned subsidiary of Fujikon, that the Headphone would be discontinued (the “Discontinuance”). Fujikon only published an announcement on 6 June 2014 regarding the Discontinuance and provided details of the substantial revenues which the Headphone had generated for the Group in FY2013 (around 10%) and FY2014 (around 14%) (the “Announcement”).
Statutory disclosure requirements for inside information
What constitutes “inside information”?
According to section 307A(1) of the SFO, a piece of information is regarded as “inside information” in relation to a listed corporation if it is:-
- specifically about the corporation, a shareholder or officer of the corporation, or the listed securities of the corporation or their derivatives;
- not generally known to the persons who are accustomed to or would likely deal in the listed securities of the corporation (i.e. the investors who are currently holding the listed corporation’s shares and the market); and
- if generally known to them, would likely affect the price of the corporation’s listed securities materially.
When and how should the disclosure be done?
Under section 307B of the SFO, a listed corporation must disclose any inside information to the public as soon as reasonably practicable after it has come to its knowledge, which is when:-
- the inside information has, or ought reasonably to have, come to the knowledge of an officer of the corporation in the course of performing his functions as an officer; and
- a reasonable person acting in the officer’s position would consider that as inside information in relation to the corporation.
Under section 307G of the SFO, officers of a listed corporation must take all reasonable measures to ensure that proper safeguards do exist to prevent any breach of the above disclosure requirements. An officer is also in breach of such disclosure requirements if his intentional, reckless or negligent actions and/or conducts have led to the breach by the listed corporation.
Concerning the manner of disclosure, media and channels that can provide for equal, timely and effective access by the public to the information disclosed should be used. Section 307C of the SFO prescribes that using an electronic publication system operated by a recognized exchange company will fulfil such requirement.
The Agreed and Admitted Facts and the Agreed Orders
Before the hearing of the disclosure proceedings, the SFC, Fujikon, Mr Yeung and Ms Chow jointly submitted a letter containing (i) a Statement of Agreed and Admitted Facts (“Admitted Facts”) and (ii) the Agreed Proposed Orders (“Agreed Orders”) to the MMT.
The salient matters in the Admitted Facts are as follows:-
- The Discontinuance constituted “inside information” as it was specific information about Fujikon and was not generally known to persons who were accustomed or would be likely to deal in the listed shares of Fujikon, but would, if generally known to them, have been likely to materially affect the price of the shares. This was particularly so given (i) the manufacturing of the Headphone accounted for substantial revenues of the Group in FY2013 and FY2014; and (ii) Fujikon had previously issued a profit warning announcement in January 2014, which led to a 5.64% fall in the closing share price on the next trading day and thus the Discontinuance was likely to have a material impact on the share price of Fujikon, had it been known to the public.
- The Discontinuance came to the knowledge of Ms Chow on 16 April 2014 in the course of performing her functions as the CFO when the Discontinuance was reported at an internal meeting which she had attended (the “Internal Meeting”). The Discontinuance also came, or ought reasonably to have come, to the knowledge of Mr Yeung on 6 May 2014 in the course of performing his functions as the CEO when he received an email attaching minutes of the Internal Meeting.
- In the circumstances, the inside information about the Discontinuance had or ought reasonably to have come to the knowledge of Fujikon on or about 16 April 2014, or alternatively by 6 May 2014 the latest. However, the Announcement was only published some 7 weeks later on 6 June 2014. It was undisputed that Fujikon was in breach of the disclosure requirement at section 307B(1) of the SFO.
- Mr Yeung and Ms Chow, as officers of Fujikon, were aware of the Discontinuance long before the publication of the Announcement. However, both failed to take sufficient steps to consider the impact of the Discontinuance and cause timely disclosure of the information about the Discontinuance to the public. Their negligent conduct resulted in Fujikon’s breach of the disclosure requirements. As such, Mr Yeung and Ms Chow were in breach of the disclosure requirement under section 307G of the SFO.
Based on the Admitted Facts, the MMT determined that Fujikon, Mr Yeung and Ms Chow were in breach of the disclosure requirements under the SFO.
According to the Agreed Orders, Fujikon, Mr Yeung, Ms Chow and the SFC agreed to the orders of (i) regulatory fines; (ii) appointing an independent professional adviser approved by the SFC to review Fujikon’s procedures for compliance with the disclosure requirements under the SFO; and (iii) Mr Yeung and Ms Chow to undergo a training programme on compliance with the said disclosure requirements, directors’ duties and corporate governance. In light of the circumstances of this case, the MMT considered the Agreed Orders appropriate.
The MMT further pointed out that it would be neither appropriate nor proportionate to disqualify Mr Yeung and Ms Chow as directors, or to make cease-and-desist orders. The MMT cited the decision of Yorkey Optical International (Cayman) Ltd Report, which described a cease-and-desist order as a permanent injunction, similar to a permanent good behaviour order. Given its far-reaching consequences, the MMT shall have a discretion and shall not be bound to make such order in every case of breach of the disclosure requirements. It would be a fact sensitive balancing exercise. Since this incident of late disclosure was Mr Yeung and Ms Chow’s first breach, and was caused by their negligence instead of intentional or recklessness behaviour, the MMT considered that it was inappropriate to make any disqualification or cease-and-desist orders.
The SFO imposes statutory duties on listed corporations and their officers to disclose inside information in a timely manner. Officers of listed corporations are reminded to implement proper procedure for collection and transmission of inside information to ensure due compliance with the statutory disclosure requirements.
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