Introduction

If an acquisition by a listed company qualifies as a Very Substantial Acquisition under the Listing Rules of the Stock Exchange of Hong Kong (“SEHK”), the listed company is under certain disclosure obligations including making timely announcement, issuing a circular and preparing an accountants report for the protection of public investors.

Officers of the listed company may be criminally liable for conspiracy to defraud if they knowingly and intentionally cause the SEHK to permit the publication of an inaccurate public announcement and an inaccurate circular by making false representations. The conviction of the defendants in a recent case HKSAR v Chen Keen & others [2023] HKCFI 2484, including a former chairman of a listed company, provide a vivid example to the above principle.

Background

Relationship between the parties

The 2^nd Defendant controlled all three companies which are the target companies of the relevant acquisition by the Listed Company (see below for definition), namely UBNZ Trustee Ltd (“UTCL”), and its wholly owned subsidiaries UBNZ Funds Management Ltd (“UBFM”) and UBNZ Assets Holdings Ltd (“UBAH”).

At that time, the 2^nd Defendant was looking for New Zealand farms to purchase and enter into negotiation with a “CraFarms Group” to acquire certain dairy cattle farms. The 1^st Defendant then signed a commission sharing agreement with the 2^nd Defendant and another individual which provides that the Commission received through such purchases will be shared equally among themselves.

The acquisition by the listed company

Some months later, the 1^st Defendant approached the then director and chairman of China Jin Hui Mining Corporation Ltd (later renamed as Natural Diary (NZ) Holdings Limited) (the “Listed Company”), then a moribund company, to discuss acquisition of farms from New Zealand which was regarded as a project with potential. The 1^st Defendant was then appointed a director and co-chairman of the Listed Company to facilitate negotiation with the 2^nd Defendant.

Thereafter, the Listed Company entered into an Agreement with UTCL and UBFM to purchase the shares of UBAH which the vendors undertook would become the owner of the New Zealand farms (the “Acquisition”). Since the Acquisition qualified as a Very Substantial Acquisition, under the Listing Rules of the SEHK, the Listed Company was under the disclosure obligations to make a public announcement, issue a circular and prepare accounting information of the New Zealand farms to be acquired. The Acquisition was conditional upon shareholders’ approval.

Conspiracy to defraud by the defendants

During the compilation of accounts for the Acquisition, the 2^nd Defendant exerted pressure to the 3^rd Defendant, a consultant engaged to compile the accounts, to recast the figures in various way to alter the overall deficit of NZD5,420,975 to present an overall surplus of NZD14,875,785. After further manipulation, the purported net profit figure for the 10-month period ended 31 March 2009 had been further revised upwards to NZD17,789,715.

In seeking the SEHK’s permission to issue the Circular, the SEHK stated that it had received a complaint that the 2^nd Defendant was the sole shareholder and director of the vendor UTCL and that the 1^st Defendant, as the executive director of the Listed Company, is partnering with the 2^nd Defendant. The SEHK asked whether the allegations was accurate such that the Acquisition shall become a connected transaction under the Listing Rules.

The 1^st Defendant responded by saying that he had met the 2^nd Defendant at non-business related events but there were no existing or prior relationship between himself and the 2^nd Defendant with respect to the Acquisition. In the circular later published by the Listed Company, it was stated that to the best of the information, knowledge and belief of the Directors, each of the Vendor, the Target Company and the ultimate beneficial owner are independent Third Parties to the Company and its connected persons.

At an extraordinary general meeting, the shareholders of the Listed Company approved the Acquisition.

Procedural history

The misconducts of the defendants (false representations) later transpired, leading to the prosecution of two counts of conspiracy to defraud against each of the 1^st to 3^rd defendants. The 1^st count alleged a conspiracy to defraud the SEHK and the 2^nd, a conspiracy to defraud the Listed Company and its existing shareholders. Each of the defendants were convicted for both counts of conspiracy to defraud at trial.

All the defendants appealed to the Court of Final Appeal on a technical ground of the rule against duplicity. The defendants alleged that the false representation about the relationship between the 1^st Defendant and 2^nd Defendant and also the false representation about the profits of the New Zealand farm constitute two different conspiracies and involved different co-conspirators. Putting two conspiracies into one count of conspiracy to defraud contravene the rule against duplicity. The Court of Final Appeal agreed and held that the convictions were thus unsafe, ordering a retrial.

Retrial

Following the re-trial, the 1^st and 2^nd Defendants were found guilty by a jury of four counts of conspiracy to defraud while the 3rd Defendant was convicted of two counts of conspiracy to defraud.

The 1^st, 2^nd and 3^rd Defendants were jailed for seven years and three months, seven years and nine months and four years and nine months respectively. In sentencing, Madam Justice Anna Lai Yuen-kee said the 1^st and 2^nd Defendants were masterminds and instigators of the scam, which had a grave impact on the general public and the stock market. The 3^rd Defendant played a lesser role but he was willing to participate in the scam.

Key takeaways

The case demonstrates the importance of providing true and accurate information to the SEHK while discharging the disclosure obligations imposed by the Listing Rules. If inaccurate information is knowingly and intentionally provided, not only is there a breach of the Listing Rules but there is also risk of being criminally liable for conspiracy to defraud.