Thursday, January 27, 2011

Hong Kong Courts Support SFC’s Corporate Governance Actions

Hong Kong courts have issued rulings backing the Securities and Futures Commission actions against company directors and thereby enhancing the corporate governance of listed companies. Recently, the SFC achieved a breakthrough in investor protection by obtaining orders in the High Court to disqualify company directors on new grounds, namely the failure to make timely disclosure of material information to shareholders. In addition, the SFC obtained a court order directing the company to commence civil proceedings to seek recovery of compensation for the loss and damage suffered by the company as a result of directors’ misconduct

In another action, two former executive directors were disqualified from being directors or being involved in the management of any corporation, without leave of the court, for five years and two years respectively. Both directors accepted that they failed to manage the company with the necessary degree of skill, care, diligence and competence as reasonably expected of persons of their knowledge and experience holding their offices and functions within the company and failed on a number of occasions to ensure that the company complied with the disclosure requirements under the Listing Rules and to give shareholders all the information they might reasonably expect.

The Commission has noted that company directors are in positions of substantial trust and responsibility. As such, they have an obligation to ensure the market is properly informed. Directors who breach their obligations, commit misconduct or keep bad news to themselves when it should be disclosed, cause real damage to the company, their shareholders and the market. Directors also have an obligation to ensure that the company reports material information to the investing public on a timely basis. Failure to do so destroys transparency, trust and confidence in the market, emphasized the Commission.

In commencing proceedings to seek compensation orders, explained the Commission, it does not seek to make directors personally responsible for financial losses that are incurred in good faith. Rather, the SFC focuses on cases where alleged misconduct and bad faith by directors have led to the loss of shareholders’ funds. There is no reason why shareholders should pay for losses caused by directors’ misconduct, reasoned the Commission.