Peter Madhavan (Madhavan) and Ong Seow Yong (Ong), two former IDs of Airocean, were acquitted by the High Court in July and their five-year disqualifications from holding office as directors were overturned. These individuals and the then Chief Operating Officer had in 2005 released statements saying that Airocean’s then chief executive officer (CEO) had been questioned by the Corrupt Practices Investigation Bureau (CPIB) in relation to practices in other companies. The trio were accused of downplaying the situation by omitting crucial information in the announcements released via SGXNet, such as the fact that the CPIB investigation extended to other Airocean units.

The charges related to (i) making a misleading statement prohibited under Section 199 of the Securities and Futures Act (SFA) (Misleading Statement) which would be misleading in a material particular; and (ii) failing to notify the SGX that the CEO had been questioned, arrested and released on bail (Non-Disclosure), such information being likely to materially affect the share price of AirOcean and thereby contravening continuous disclosure requirements under Section 203 of the SFA.

The prosecution’s case was that the IDs involved had committed the offences primarily to stabilise Airocean’s share price, in breach of Section 199 of the SFA. The directors had taken independent legal advice, which was to the effect that there was no obligation to disclose that the CEO had been placed under arrest by the CPIB and was released on bail. The District Court found in favour of the prosecution.

On appeal at the High Court, the Honourable Chief Justice (CJ) held that the IDs had no mens rea in committing the offences of Non-Disclosure and Misleading Statement. The act of (i) taking legal advice; and (ii) acting pursuant to such legal advice, showed that the IDs had not acted recklessly. Where a client relied on legal advice from his lawyer without asking for reasons and the advice turns out to be wrong, it would not be due to the client having deliberately taken the risk of the advice being incorrect. A client generally does not have a duty of care to question their lawyer’s advice unless it is on its face, plainly wrong. In this case, even though Madhavan was a lawyer, he sought legal advice in an area which was not his area of speciality and abided by it.

Moreover, the CJ held that the threshold of materiality in the charges relating to the Misleading Statement and Non-Disclosure had not been met:

  1. the subject of the investigation into the CEO related to an insignificant portion of Airocean's business and therefore would not have impacted Airocean's overall commercial interests or its share price; and
  2. the disclosures, even if they had been made, would not have left investors believing that the CEO could not continue to run Airocean and to therefore want to sell their shares in the company.

In considering if the threshold of materiality had been met, the CJ rejected reliance on hypotheticals and examined the actual share price movements after the news of the investigation and arrest of the CEO broke. There had been an overlap in timing with the news that the authorities had commenced investigations into the Board’s earlier failure to disclose the CPIB investigations involving the CEO.

A clear distinction is drawn in the SFA between the 2 regimes of materiality as applied to "materially price sensitive information" vs "trade sensitive information“, which has different application for offences for Non-Disclosure / Misleading Disclosure vs Insider Trading offences.

Materiality when applied to continuous disclosure (under which both Non-Disclosure and Misleading Disclosure fall) has to be “important or significant to the determination or resolution of that issue”, such that the information must be likely to effect a significant change in the price or value of securities.

Lessons Learnt from the Airocean Saga

While many industry players and market observers breathed a sigh of relief from the High Court’s decision in the Airocean saga, the CJ’s judgement most definitely does not serve to lower the standards of disclosure required from directors. While directors may not be required to disclose trade-sensitive information, they do have an obligation to disclose information that is materially price sensitive, that is, information which is likely to effect a significant change in the price or value of securities of the company.

Moreover, if directors are uncertain as to whether or not to disclose, it would be prudent to seek independent legal advice on the question of disclosure. It is not unreasonable for directors to rely on such independent legal advice, as highlighted in the CJ’s decision. However, directors do need to exercise independent judgement in assessing the independent legal advice sought and whether or not on its face the advice is plainly wrong and should be disregarded. In the event that the independent legal advice is not heeded, it would be prudent for directors to seek a second legal opinion and directors should instil a practice of recording minutes of informal meetings or attendances noting down the reasons which directors have provided in heeding (or not heeding) independent professional (legal or otherwise) advice sought.