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Independent directors emit sigh of relief
Kenneth Lim
06 August 2012
The High Court’s recent acquittal of two former board members of Airocean Group may make it harder to prosecute independent directors of Singapore-listed companies, observers said.
While Chief Justice Chan Sek Keong’s ruling maintained the status quo on insider trading law, it nevertheless clarified that companies may not have to disclose information simply because it is trade sensitive - that information has to be likely to significantly move the share price as well. And directors in most instances should not be expected to question professional advice that they receive with respect to how they discharge their duties.
“I think the collective sigh of relief from independent directors in Singapore must have been loud enough to be heard all throughout the land,” said Adrian Chan, head of the corporate department at Lee & Lee and vice-chairman of the Singapore Institute of Directors.
Independent directors in Singapore took particular and concerned notice of the long-running Airocean case in 2011 when a district judge convicted former Airocean independent directors Peter Madhavan and Ong Seow Yong on charges related to disclosure lapses from 2005 relating to the corruption investigation of ex-Airocean chief executive Thomas Tay.
Mr Madhavan was sentenced to four months’ jail, the first time an independent director in Singapore was threatened with imprisonment. He and Mr Ong also faced fines.
A third Airocean executive, former chief operating officer Johnson Chong, was also sentenced to jail and a fine on charges relating to disclosure breaches and insider trading.
“The Airocean decision in the Court below had given some cause for concern in the industry because up till then there had been very few prosecutions of independent directors, and no independent director had previously been given a custodial sentence,” said Joy Tan, Wong Partnership partner and joint head of corporate governance and compliance.
The directors appealed their convictions. On July 27, Justice Chan overturned all of them as well as the sentences for Mr Madhavan and Mr Ong. Chong’s insider trading conviction was upheld, but his sentence was reduced to just a $200,000 fine.
In explaining his decision, the judge laid out two principles that are seen as clarifying the responsibilities of independent directors, although the jury is still out on whether the ruling will improve the quality of corporate governance in Singapore.
First, and somewhat surprisingly, Justice Chan looked at the language of the law and found that what must be announced depends on whether the holder of information trades on that knowledge. While a piece of information only has to be price- sensitive to be disclosable for insider trading purposes, it must also be likely to significantly affect the share price to be disclosable for the purpose of continuous disclosure.
“My analysis of the relevant provisions may seem surprising to some market participants,” the judge wrote. “But, in my view, this differentiation between the continuous disclosure regime and the insider trading regime is not indefensible from the perspective of commercial morality and market integrity.
“If trade-sensitive information is not disclosed to the market, no investor can be said to be worse off, provided investors in possession of trade-sensitive information do not trade in securities using such information...whether or not this distinction between our continuous disclosure regime and our insider trading regime is defensible is not the point here. It is a distinction that flows from the legislative and the regulatory structures that Parliament and SGX (Singapore Exchange) have put in place.”
That finding caused a people in the corporate world to do a double take.
Perry Yuen, head of corporate and securities at KhattarWong, said the distinction was important.
“This distinction should stay, because if you merge it you either bring it [the threshold] very low, or you bring it very high, and then you could be protecting the crooks,” he said.
But Associate Professor Mak Yuen Teen at the National University of Singapore thought that the ruling may have given independent directors too much leeway. “While I respectfully accept that the judgment may be legally correct given the SFA provisions and the burden of proof, it essentially makes the SFA provisions virtually unenforceable in my opinion,” he said.
Justice Chan also found that the independent directors could not have been found to be reckless because they sought and followed legal advice about what and whether to disclose information.
“Clients have no duty to question their lawyer’s advice and it would not be reasonable to expect or require them to do so, unless the advice is manifestly absurd, irrational or wrong,” the judge wrote.
Prof Mak said he was concerned about how this part of the ruling would be translated into practice.
“I hope independent directors and other directors do not interpret this as saying that they can just rely on professional advice without exercising their own independent judgment,” he said. “I’m not saying this is the case here, but certainly, we don’t want directors to just hire professional advisers and leave their brains outside the boardroom.”
Lee & Lee’s Mr Chan said the ruling did not make it easier to take cover behind professional advice. “I don’t think they can hide...I think what it means is that if the independent directors do all that’s necessary and take all reasonable steps, I think the court will be sympathetic.”
Overall, the ruling was seen as removing the chilling effect that the initial convictions had cast on the practice of independent directorship.
“This may be good for independent directors in the sense of reducing their legal risk and make them more willing to be independent directors,” Prof Mak said. “However, it does highlight the challenges in enforcing directors’ duties and if it becomes almost impossible to enforce and hold directors accountable, this would be bad for corporate governance.”
Ms Tan said boards will also enjoy more flexibility.
“The decision may give boards more discretion to take a robust view, in the interests of shareholders, as to whether information has to be announced or not, especially when the impact of the information on share price is unclear,” she said.