The Hong Kong Court of Final Appeal (CFA) in HKSAR v. Luk Kin Peter Joseph (08/12/2016, FACC6/2016) (CFA Decision) has clarified the scope of agency under the Prevention of Bribery Ordinance (POBO) and highlighted the importance of having proper disclosure of interest in group companies. When deciding on the agency relationship for the purpose of the POBO's private sector offence, the CFA has held that it is not necessary to have a pre-existing legal, contractual or fiduciary obligation to act in relation to that principal’s affairs or business.
Our alert discusses this development and its implications.
Implications for corporate clients
The CFA Decision is significant in the context of group company situations. There are two aspects to this.
- Although the defendants were only the directors of a subsidiary, they were found to be agents acting on behalf of the parent company and guilty of the relevant offences under section 9 of the POBO. The CFA confirmed that if a person is in a position to act on behalf of another company even without any pre-existing obligations, he can be considered to be an agent and have fiduciary duties towards that principal in the context of the POBO.
- The other more important point is in relation to disclosure of interest. While the prohibition against offering or accepting bribes for an agent's act or forbearance in respect of his principal’s affairs is generally well known, the CFA Decision brings attention to the offence of corrupt transactions with agents not involving any advantage.
Under section 9(3) of the POBO, it is an offence for an agent who, with intent to deceive his principal, uses any receipt, account or other document in respect of which the principal is interested and which contains a false or erroneous statement that is intended to mislead.
In transactions involving group companies and listed companies, where a director has an interest in a transaction and is acting on behalf of a company (of which he is not necessarily a director as in this case), that director should make full and proper disclosure of his or her interest. Failure to make proper disclosure can lead to false or erroneous statements in documents and may expose the director to a risk of private sector bribery under section 9(3). Of course, such failure can also cause listed companies to breach their obligations under the Stock Exchange Listing Rules.
This case reminds companies to have compliance policies and guidance to their management and employees as well as robust practice on disclosure of interest. They are necessary not only for compliance of listing requirements but also for avoidance of the potential risk of acting as an agent of other group companies and falling foul of the private sector offence under the POBO.
Background of the case
Joseph Luk and Yu Oi Kee were sole directors of Biogrowth Assets (Biogrowth), a wholly owned subsidiary of China Mining Resources Group (China Mining), a company listed in Hong Kong. Luk and Yu were not directors of China Mining. Biogrowth in turn wholly owned Cell Therapy Technologies Centre (Cell Therapy). United Easy Investments (United Easy), a company apparently controlled by the aunt of Luk’s wife, acquired Cell Therapy for HK$15 million (Transaction).
The board of Biogrowth had to authorize the Transaction and it was necessary that the resolution declare any interest of its directors in the Transaction. If there was none, China Mining would be able to notify the Stock Exchange that United Easy and its ultimate beneficial owners were independent of both the company and its connected persons. Luk and Yu signed board minutes of Biogrowth authorizing the Transaction and stating that none of Biogrowth’s directors had an interest in the Transaction. Luk bribed Yu to cooperate in publishing the false declaration in the board minutes by offering her 1.5 million of his shares in China Mining.
At trial, Luk was found to be the true beneficial owner of United Easy such that the Transaction was a connected transaction requiring disclosures and subject to voting restrictions in accordance with the Listing Rules. Luk and Yu were found guilty of a conspiracy to commit an offence under section 9(3) of the POBO which, among other things, relates to an agent's intention to deceive his principal using any receipt, account or other document in which the principal is interested and which contains false statements. Luk was also found guilty of offering a bribe, and Yu, as an agent of China Mining, was found guilty of accepting a bribe.
The CFA dismissed the defendants' appeals and found that Luk and Yu acted as agents of China Mining. The court considered that to become an agent of another under section 9 of the POBO, it is not necessary to have a pre-existing legal, contractual or fiduciary obligation to act in relation to that person’s affairs or business. It is not even necessary that there should have been a request to act. A person who is in a position to act on behalf of another and voluntarily does so may also thereby assume fiduciary duties.
Actions to consider
We recommend that clients take the following steps:
- Review and seek legal advice on internal policies on disclosure of interests, connected transactions and acceptance of advantages.
- Conduct regular training to management and employees on anti-bribery best practices as well as disclosure of interests and its internal polices.
The CFA Decision illustrates the broad scope of agency in private sector bribery. Corporates and listed companies should be aware of the importance of having proper disclosure of interest and therefore should provide clear guidelines to their management and employees across their entire corporate groups on disclosure of interests and acceptance of advantages.