On June 20, 2012, the Court of First Instance (the “CFI”) granted orders under section 213 of the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) (the “SFO”) requiring Hontex International Holdings Company Limited (“Hontex”) to make a repurchase offer at HK$2.06 per share (totaling approximately HK$1 billion) to its current public shareholders as a result of Hontex’s false and misleading prospectus.
This is the first time a share repurchase order was made against a Hong Kong-listed corporation as a result of market misconduct. Similarly in the Tiger Asia case which is on appeal to the Court of Final Appeal (the “CFA”), the Securities and Futures Commission (the “SFC”) sought, among other orders, final remedial orders to restore the counterparties to their pre-transaction position and to prohibit the offending parties from trading on the Stock Exchange of Hong Kong Limited (the “SEHK”).
In this update, we look at the application of section 213 of the SFO and the implications that the Hontex and the Tiger Asia cases may have on the SFC and the CFI in seeking and granting final remedial orders in market misconduct cases.
The Hontex Case
Hontex was listed on the SEHK on December 24, 2009 at an IPO price of HK$2.15 per share. On March 30, 2010, trading in Hontex shares was suspended at the direction of the SFC. The closing price of Hontex shares on March 30, 2010 was HK$2.06 per share. The SFC alleged that Hontex’s IPO prospectus contained material overstatements in relation to its financial position and contravened the Companies Ordinance (Cap. 32 of the Laws of Hong Kong) (“CO”). The SFC subsequently commenced proceedings in the CFI under section 213 of the SFO seeking the following orders:
- an injunction to freeze the assets of Hontex up to HK$997,400,000, being the total amount of proceeds raised in the IPO; and
- final remedial orders aimed to restore the shareholders to their original position that they would have been in if they had not acquired Hontex shares.
The Tiger Asia Case
Eight months prior to the commencement of proceedings against Hontex, the SFC pursued another market misconduct case under section 213 of SFO. On August 5, 2009, the SFC commenced proceedings in the CFI under section 213 of the SFO against Tiger Asia Management LLC (“Tiger Asia”), alleging contravention of the insider dealing and/or false trading provisions of the SFO. The SFC sought:
- declarations that there have been contraventions of the insider dealing and false trading provisions of the SFO by Tiger Asia and its senior officers;
- an injunction to freeze the assets of Tiger Asia up to HK$29.9 million, being the notional profit made from the alleged insider dealing and/or false trading;
- final remedial orders to unwind the relevant share trades and to restore the affected counterparties to their pre-transaction position; and
- an order to prohibit Tiger Asia and its senior officers from trading on the SEHK.
Section 213 of the SFO
Under section 213(1)(a)(i)(A) of the SFO, where a person has contravened any of the provisions of the SFO and certain provisions of the CO, the CFI, on the application of the SFC, may make a number of orders including:
- orders restraining or prohibiting the offending conduct;
- orders restraining or prohibiting a person from dealing in any property;
- orders appointing an administrator to a person’s property;
- orders requiring steps to restore the parties to any transaction to the position in which they were before the transaction was entered into;
- orders declaring a contract to be void or voidable; and
- orders requiring payment of damages.
SHARE REPURCHASE ORDER AGAINST HONTEX
On June 20, 2012, the SFC and Hontex agreed a set of facts whereby Hontex acknowledged that it:
- was reckless in allowing materially false and misleading information to be included in its prospectus which induced investors to subscribe and purchase its shares; and
- contravened section 298 of SFO.
On the basis of Hontex’s admission of market misconduct and by consent of the parties, the CFI made an order under section 213 of the SFO requiring Hontex to make a repurchase offer to public shareholders who subscribed for Hontex shares in the IPO or purchased them in the secondary market and who are currently still holding Hontex shares. The repurchase will not be by way of a scheme of arrangement, but will be a corporate action to be approved by a simple majority of Hontex shareholders in an extraordinary general meeting, with the controlling shareholders abstaining from voting. The repurchase offer, if approved, will not be extended to the controlling shareholders of Hontex. The repurchase price will be HK$2.06 per share, being the closing price of Hontex shares when trading was suspended.
As the Hontex repurchase order was made on the basis of an admission of contravention by Hontex, the CFI did not need to consider the issue of jurisdiction which was raised in the Tiger Asia decisions and which remains the subject of appeal to the CFA.
TIGER ASIA DECISIONS
On June 21, 2011, the CFI struck out the SFC’s action against Tiger Asia and its senior officers for disclosing no reasonable cause of action and being an abuse of process and held, among other things, that the CFI does not have jurisdiction to determine a contravention of the market misconduct provisions in Part XIII or Part XIV of the SFO and that such determinations may only be made by the Market Misconduct Tribunal (the “MMT”) or a criminal court.1
The SFC appealed to the Court of Appeal (the “CA”) and on February 23, 2012, the CA overturned the CFI’s decision and held that the CFI has the jurisdiction to determine whether the precedent fact of contravention has occurred and section 213 was meant to augment the SFC's ability to protect the investing public and provide remedies for contraventions for the protection of investors.2
On April 18, 2012, the CA granted leave to Tiger Asia and its senior officers to appeal to the CFA. As of the date of this update, the jurisdiction issue remains unresolved.
THE DUAL CIVIL AND CRIMINAL REGIME UNDER THE SFO
Under the SFO, where there is a potential case of market misconduct, the SFC may institute civil proceedings in the MMT under Part XIII of the SFO or the Secretary for Justice may bring prosecution in a criminal court under Part XIV of the SFO. Part XIII and Part XIV proceedings are mutually exclusive in that either civil or criminal proceedings, but not both, may be brought in respect of the same market misconduct.
It is in light of this dual regime that the question arises as to the CFI’s power to make determinations as to contravention of the SFO and make final remedial orders, in the absence of a finding of contravention by the MMT or a criminal court.
The following chart illustrates the current state of the market misconduct liability regime under the SFO.
Implications of the Hontex Repurchase Order
This is the first time a share repurchase order was made against a Hong Kong-listed corporation as a result of market misconduct. The court order requires Hontex to make a repurchase offer to its current shareholders at $2.06 per share regardless of whether they subscribed for the shares in the IPO or purchased them in the secondary market. As the case was a negotiated settlement, there is no court judgment to explain the rationale for setting the repurchase price at $2.06 or entitling only current shareholders, rather than the original subscribers of Hontex shares at the time of IPO, to this remedy.
Although the Hontex case should not be interpreted as suggesting that the court will always or will ever make such orders in future cases, this case demonstrates the SFC’s increasing efforts in pursuing market misconduct cases and is likely to bolster such efforts and lead to more enforcement actions, either through formal court proceedings or negotiated settlement.
Implications of the Tiger Asia Decisions
The CFA’s final ruling will have a significant bearing on the extent of the SFC’s enforcement powers. If the CFA upholds the CFI’s decision, the SFC can only pursue market misconduct activities under the dual regime discussed above. On the other hand, if the CFA agrees with the CA’s decision, the SFC has a further option to take perpetrators of market misconduct directly to court and seek final remedial orders. As section 213 proceedings and criminal prosecution are not mutually exclusive, wrongdoers may potentially face civil and criminal liability.