No sooner did the SFC bring landmark proceedings against one listed company (Rontex—above) under section 214, before proceeding to bring other landmark proceedings to make full use of its civil powers under section 213 to freeze the entire proceeds of an initial public offering (IPO).
Section 213 effectively entitles the SFC to obtain an injunction against licensed persons or registered institutions that breach relevant provisions of the SFO. Section 213 does not however go so far as to override the well-known thresholds / tests laid down in American Cyanamid that govern whether or not a court is willing to exercise its jurisdiction to grant such discretionary relief. Typically, an injunction will only available where a petitioner has acted quickly, there is a risk of dissipation of assets and damages is an inadequate remedy. To the extent of any doubt as to adequacy of damages, then the court ought to assess the balance of convenience which the objective that the decision rests with the course which involves the least risk of injustice.
The SFC alleged that Hontex disclosed materially false or misleading information and materially overstated its financial position in its IPO prospec-tus (in December 2009), which was likely to have induced investors to subscribe for its shares. On 31 March, some three months after Hontex’s IPO went live, the SFC applied on (an ex-parte basis) and obtained an urgent interim order from the High Court to freeze up to HK$997 million in assets of Hontex International Holdings Company Ltd (Hontex) and four of its wholly owned subsidiaries. The amount of assets frozen represents the net proceeds raised by Hontex in its IPO in December 2009. To date, the SFC has identified approximately HK$832 million held in bank accounts of Hontex and its four subsidiaries in Hong Kong. The SFC is continuing to identify more assets up to the value of $997 million and investigate its allegations about the false or misleading disclosure by Hontex. The SFC’s filing also seeks a variety of relief extending to restoration or compensation orders. The conse-quences of the SFC’s claim, if successful, would include the unwinding of all secondary trades by innocent investors (who may be required to disgorge any profits earned) as well as repayment of all shares allocated to eligible investors during the subscription period before launch, all of which will no doubt present significant logistical challenges that might tie up liquidity of investors’ funds for sometime to come.
These remedies clearly represent unprecedented and drastic steps taken by the SFC to protect investors. However, arguably, pending publication of the decision of the High Court, given the thrust of the SFC’s complaint apparently relates to state-ments made in a prospectus published more than 3 months ago, it remains to be seen whether the SFC might have gone too far or, at worst, begs the question of why these matters could not have been discovered much earlier by the regulatory authori-ties and the listing either shelved or postponed.