Introduction

In the recent judgment of Chan and Others v Securities and Futures Commission [2020] HKCA 425, the Court of Appeal considered the Market Misconduct Tribunal’s (the “MMT”) decision on the test for disclosure of inside information under Part XIVA of the Securities and Futures Ordinance (“SFO”) in respect of Mayer Holdings Limited (stock code: 1116) (the “Company”) and its officers (collectively, the “Appellants”).

When the Securities and Futures Commission (the “SFC”) first commenced the proceedings in the MMT against the Company, we had discussed about the background of the case and the allegations raised by the SFC in our March 2016 Newsletter.

Grounds of appeal

As matters transpired, the MMT determined in a report dated 7 February 2017 that there was a breach of the disclosure requirement by the Appellants. The Appellants had then applied to appeal against the decision of the MMT in respect of both liability and sanction. The grounds of appeal before the Court of Appeal are as follows:

1.        s.307A(3) of the SFO is concerned only with the listing status of securities. The MMT was wrong to interpret it to mean that securities which had been suspended from trading should be regarded as if they had nevertheless been continuously trading; and

2.        the MMT was wrong in relying on the evidence of the SFC’s market expert (the “Market Expert”) whose analysis had been conducted on the false premise that the securities had not been suspended from trading. 

Facts

In view of the grounds of appeal, the major factual matter that concerns the Court of Appeal relates to the suspension of the trading of shares of the Company, which took place from 21 November 2011 to 5 January 2012.

On 5 January 2012, the Company announced the disposal of its principal subsidiary at an expected loss of RMB6.4 million. On 6 January 2012, trading resumed for one day with closing price of $0.123. Thereafter, trading suspended again and remained suspended during and beyond the trial before the MMT. After the said disposal of subsidiary, investors would have concluded that the Company’s “next major business” would be a port property development project in Vietnam (the “Vietnam project”).

During the period of suspension, a number of post-suspension events and “bad news” which affected the Company negatively occurred. In particular, on 23 January 2013, the Company made an announcement (the “Announcement”) in relation to the resignation of its former auditors, Grant Thorton Hong Kong Limited (“GT”) and the reasons for GT’s resignation, including references to “the substance of disposal of an available-for-sale financial asset, the ownership and control of the Vietnam project and the existence and commercial substance of prepayment to suppliers by the Company’s jointly controlled entities”, which are in fact references to unresolved accounting issues identified by GT in April 2012.

SFC’s allegations

Under the MMT proceedings, the SFC alleged that the Company and the Appellants failed to duly disclose three categories of information (the “Information”):

1.        the resignation of GT on 27 December 2012 which was only disclosed on 23 January 2013;

2.        the unresolved accounting issues identified by GT, leading to GT’s indication that they would issue a qualified audit report, which include: (a) the disposal of the principal subsidiary at a loss; (b) the Company’s control over, and the valuation of the Vietnam project; and (c) the recoverability of unsecured prepayments made by its subsidiaries to certain suppliers who had failed to perform in accordance with the prepayment schedule (the “Unresolved Accounting Issue”); and

3.        the circumstances surrounding the Unresolved Accounting Issue.

For the purpose of the MMT proceedings, the SFC engaged the Market Expert to assess the nature and impact of the Information. In gist, the instructions given to the Market Expert premised on the basis that trading in the Company’s shares have not been suspended. 

Market Expert’s opinion and the MMT’s findings

On the said basis, the Market Expert gave the opinion that, among others, the resignation of GT and the Unresolved Accounting Issue were not generally known to the public. In particular, if the resignation of GT had been generally known to the general investors, it would have affected the price of the Company negatively and the absence of details of the Unresolved Accounting Issue in the Announcement would leave investors to incorrectly evaluate the impact of their trades.

In arriving at this conclusion, the Market Expert was not concerned with whether the effect of the relevant Information on the price would have been “material”, but that as the particular Information is important, it must have been price-sensitive.

The MMT adopted the approach that “the trading assumption” under Part XIVA should apply as if the Company’s shares were continuously trading. Further, the MMT viewed that s.307A(3) of the SFO does not take into account the suspension of trading of shares. To that end, the MMT found that the Company was in breach of the disclosure requirement in respect of GT’s resignation and that it would be likely to materially affect the price of the Company’s shares.

Court of Appeal’s decision

The issue before the Court of Appeal requires an examination of s.307A(3) of the SFO, which provides that “securities listed on a recognized stock market are to continue to be regarded as listed during any period of suspension of dealings in those securities on that market”.

As opposed to the approach and interpretation of s.307A(3) adopted by the MMT, the Court of Appeal found that whilst a listed company does not stop being a “listed” company (for Part XIVA to apply) because dealing on that market has been suspended, the section does not say that a listed company shall be regarded as continuously dealing at the pre-suspension price despite the fact of suspension of dealing and that the status of “listed” and the activity of “dealing” are not synonymous.

More importantly, to consider only the impact of the Information on the pre-suspension price and to reject that suspension could have had an effect on the pre-suspension price, is to turn a blind eye to the important events which would also have affected the price at the time the Information fell to be considered.

Moreover, whether the Information would then still have a “material” effect on the price would involve an assessment of the particular facts of the Company involved, including the impact of the post-suspension events on the share price and there is a need to assess what the hypothetical share price would have been in light of those events.

Since the instructions to the Market Expert were given expressly on the “trading assumption”, he had not considered what the hypothetical share price would have been in light of the post-suspension events. The opinion of the Market Expert (and hence the decision of the MMT) was therefore likely to be flawed.

In view of the above, the Court ordered to remit the matter to the MMT to consider the issue as to whether the Information would be likely to materially affect the price taking into account the post-suspension events. The parties were also allowed to adduce fresh expert evidence.

Takeaway

In clarifying the confusing interpretation of s.307(A) of the SFO, the Court considered that Part XIVA of the SFO should apply even when trading of shares of a listed company has been suspended, and there is a need to consider the post-suspension events and determine a hypothetical share price in light of those events, and further assess whether the subject information would be price-sensitive based on the hypothetical share price.

On a practical side, the case also serves as a lesson on the importance of adducing expert evidence based on proper instructions. Whilst the legal representatives of the Appellants might have adopted a correct approach to the case (under the MMT proceedings or the appeal), the lack of expert evidence adduced in support of their case might have caused the eventual (erred) determination by the MMT.