Inside information disclosure during suspension of trading: Mayer Holdings v Securities and Futures Commission

Here is a not uncommon scenario in relation to Hong Kong listed companies.

Certain actual or anticipated bad news cause the trading of a listed company’s shares to be suspended.  More bad news then come along and are announced while trading in the company’s shares remains suspended.  

In this scenario, what if some of the bad news were not announced until a while after they were made known to the company, or at all?  Would this breach laws requiring the timely publication of listed companies’ inside information?  And should bad news that were announced during the suspension period be taken into account when assessing the impact of the “late” announcement(s) on share price?  These questions were considered by the Hong Kong Court of Appeal’s recent ruling in the Mayer Holdings case.

When would the stream of news ever end?

As listed companies went, Mayer Holdings was not well regarded by investors back in 2011.  As at 13 April 2011, its share price closed at HK$0.48.

Between April and November 2011, its share price decreased around 75-80%.  On 21 November 2011, trading in Mayer Holdings’ shares were suspended.

On 5 January 2012, trading in Mayer Holdings’ shares resumed when it announced a disposal of its principal business at a loss, as well as future focus on a port and property development project in Vietnam. 

The resumption of trading lasted only a day.  On 6 January 2012, trading in Mayer Holdings’ shares were again suspended after closing at HK$0.123 per share, and on 16 January 2012, it announced the commencement of litigation seeking to rescind the Vietnam development project.

As the suspension of trading continued, the bad news kept coming.  It was faced the resignation of one set of auditors and failing to publish financial results.  It was also mired in various litigation, as well as a dispute with and a resignation of independent non-executive directors. 

Meanwhile, Mayer Holdings’ replacement auditors identified various unresolved accounting issues in or around April 2012.  These auditors resigned on 27 December 2012.  This was just before legislative requirements in the Securities and Futures Ordinance (“SFO”) relating to the disclosure of inside information came into force on 1 January 2013. 

The full board of Mayer Holdings was made aware of the replacement auditors’ resignation on 18 January 2013.  Mayer Holdings publicly announced the resignation on 23 January 2013.  This announcement also contained some references to certain of the accounting issues identified by the replacement auditors.

Can one really pretend not to see a trading suspension?

The Securities and Futures Commission (“SFC”) alleged that Mayer Holdings and its senior officers breached the section 307B of the SFO.  This required listed companies to disclose inside information as soon as it is reasonably practicable to do so.  The alleged breaches related to the late or non-announcement of the resignation of replacement auditors and details of certain of the unresolved accounting issues.

By the time the case reached the Court of Appeal, the case boiled down to an interpretive fight over two provisions of the SFO.

First, “inside information” is (for present purposes) defined under section 307A(1)(b) of the SFO as non-public information which, if made public, would “be likely to materially affect the price of the listed securities”.

Second, section 307A(3) of the SFO states that when it comes to public disclosure of inside information, listed securities “are to continue to be regarded as listed during any period of suspension of dealings in those securities”.

The SFC were adamant that section 307A(3) should be interpreted as meaning that suspension of trading should be disregarded when analysing the impact of any news announced during the suspension on a listed company’s share price.  The SFC was firm on this point, instructing its expert witness on market price movements only to opine based on the assumption that trading in Mayer Holdings’ shares had not been suspended. 

Mayer Holdings and its senior officers who were brought before the Market Misconduct Tribunal (“MMT”) disagreed.  They argued that section 307A(3) merely confirmed that suspension of trading in a listed company’s shares should not lead to the company being treated as unlisted such as to be precluded from inside information disclosure obligations.

At first instance hearing, the MMT agreed with the SFC.  It therefore ignored the period of suspension and adopted a calculation of share price impact of the late/non-disclosure by reference to Mayer Holdings’ share price in January 2012. 

The Court of Appeal rejected the MMT’s approach.  It interpreted section 307A(3) as not precluding developments post-suspension of trading from being taken into account when deciding analysing what constitutes “inside information”.  On section 307A(1)(b), the Court of Appeal noted that while something like the resignation of auditors might be important news, it might not materially affect the share price as to constitute “inside information”, given a company’s overall circumstances.

Unfortunately for Mayer Holdings and its senior officers, having the Court of Appeal agree with them did not mean the conclusion of the case for them.  As no expert evidence had been adduced at first instance (ie at MMT stage) on price impacts of the late-disclosed/undisclosed “important” information if post-suspension events were accounted for, the case has to be sent back to the MMT so that this issue can be determined.

Trading suspensions: an escape from the obligation to disclose?

Procedurally speaking, it is unfortunate that the Court of Appeal was understandably left with no choice but to refer the case back to the MMT for further expert evidence.  Had expert evidence been obtained at first instance not only on the assumption of ignoring Mayer Holdings’ trading suspension, the case could have been decided on (whether at MMT or Court of Appeal stages) without further evidence being required.  Instead, both the SFC and Mayer Holdings and its senior officers are now left with yet another round of evidence and hearings, thus adding to time delays and legal costs.

On a more practical policy level, the Court of Appeal ruling potentially creates an “out” from timely disclosure of information for listed companies, especially where their shares are suspended from trading.  Such companies are typically already in difficulties.  The fact of any suspension would itself hardly be good news.  And short of news about the company’s shares being in a position to resume trading, the chances of other news related to a listed company under trading suspension being “good” are relatively low. 

In the circumstances, if post-suspension news is taken into account, then chances are that the bulk of such news would put downward pressure on a listed company’s share price.  This creates a real possibility that by the time a piece of important news is disclosed late or not disclosed at all, there already exists so much bad news that the important news is no longer price sensitive and therefore not “inside information”.  Perversely, this could mean that more bad news for a listed company (particularly where trading in its shares is suspended) means less legal obligation to disclose important information in a timely manner.

None of this is meant as criticism of the Court of Appeal’s ruling.  On its clear and plain language, the Court of Appeal’s interpretation of section 307A(3) of the SFO appears spot on, and the SFC’s interpretation did seem a bridge to far.  However, if the SFC does not appeal this ruling, or it does so but does not succeed, then query whether legislative reform should be considered to deal with the practical policy issue that arises.