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Key concepts and principles arising out of CJ’s decision in Airocean directors case should be noted
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Key concepts and principles arising out of CJ’s decision in Airocean directors case should be noted
Jaikanth Shankar
13 September 2012
The Airocean case was one of the most closely watched cases in corporate circles in recent years. It marked the first time that an independent director was sentenced to imprisonment for non-disclosure offences under the Securities and Futures Act (SFA).
Two directors of Airocean were convicted of recklessly failing to disclose material information relating to the affairs of Airocean. Three directors were also convicted of releasing a misleading announcement.
Many independent directors were, understandably, concerned about the jail sentence.
In a landmark decision, the chief justice (CJ) acquitted the independent directors. He also set aside the disqualification orders that had been imposed on the independent directors.
The CJ’s decision resulted in a collective heave of relief from industry players and market observers.
In a well-thought-out and reasoned judgment, the CJ provided some much needed guidance and clarification on the disclosure regime under the SFA. Some key concepts and principles arising out of the CJ’s decision should be highlighted.
First, his decision makes it clear that the common thread running through the disclosure regime under the SFA and the SGX (Singapore Exchange) Listing Manual is that of materiality. Not all information has to be disclosed. Only information that is materially price-sensitive - in the sense that it will have a significant effect on the price or value of the securities - is required to be disclosed.
As the CJ explained, the emphasis on materiality ensures that issuers are not unduly burdened by having to disclose every kind of information, however trivial, that may be likely to have an effect - but not a material effect - on the price of their securities. The CJ considered that the lower court failed to focus on the concept of materiality.
Second, the CJ also clarified that there are differences between the disclosure regime and the insider trading regime under the SFA.
According to the CJ, information that is required to be disclosed under the disclosure regime is information that is materially price-sensitive - that is, information that is likely to materially affect the price or value of securities. For the purposes of the insider trading regime, however, the emphasis is on whether the insider traded on information that is trade-sensitive - that is, information that would, or would be likely to, influence persons who commonly invest in securities in deciding whether or not to subscribe for, buy or sell those securities.
The distinction between price-sensitive and trade-sensitive information is not one that is familiar to industry players and market observers.
But it is a distinction which is borne out by the express terms of the provisions of the SFA, which contain different words of what is material depending on whether one is considering the disclosure regime or the insider trading regime. The CJ did no more than analyse and give meaning to the relevant provisions, and on that basis discerned Parliament’s (and SGX’s) intention.
The market has welcomed the CJ’s exposition on the law. The upshot of that distinction is that it is likely to be easier to demonstrate materiality in the context of the insider trading regime than in the context of the disclosure regime.
This writer agrees with the CJ that that distinction is defensible from the perspective of commercial morality and market integrity. As explained by the CJ, 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. There can be no question of an uneven playing field being created to the disadvantage of common investors who do not possess the same trade-sensitive information.
Third, the CJ also clarified that clients have no duty to question their lawyer’s advice, unless the advice is manifestly absurd, irrational or wrong. The CJ made this observation in the context of the lower court’s finding that even though Airocean took legal advice on whether it was obliged to make disclosure and had received advice that it was not so obliged, the directors were reckless because they had failed to ask for the reasons underlying that advice.
The CJ held that the word “reckless” in the context of the SFA comprised two elements: (a) a subjective awareness of a risk; and (b) unreasonableness on the part of the offender in taking that risk. The CJ explained that where a client relies on legal advice from his lawyer without asking the latter for the reasons for his advice, and if the legal advice turns out to be wrong, that may cause the client considerable problems or even financial ruin. But that would be a consequence of the legal advice being bad advice and not of the client having deliberately taken the risk of the legal advice being incorrect. In that context, the CJ held that far from being reckless in any sense of the word, Airocean acted properly and prudently in seeking legal advice on whether to disclose what it knew.
What do these key concepts and principles mean for directors?
The first is that the CJ’s decision does not lower or raise the bar as regards what is expected of directors. There is no substitute for independent judgment. The obligation to decide whether disclosure is required is an obligation that is owed by the issuer. It is incumbent on directors of issuers to exercise independent judgment, among various things, on matters of disclosure.
A second, related, observation is that the CJ’s decision should not be taken to be an invitation to directors to simply refer the matter to lawyers and to wash their hands of the matter. At every step of the way, the directors have to exercise independent judgment: first, in determining whether disclosure is required of matters that have been brought to their attention; second, in determining whether legal advice should be taken; third, in determining whether the advice that is obtained should be questioned; fourth, in determining whether a second opinion should be obtained; and fifth, whether disclosure should be made having regard to any advice that has been obtained and all the circumstances of the case.
As the CJ observed, the decision whether information should be disclosed calls for a fine - and often difficult - judgment on the part of issuers. There are, of course, cases where it is clear that disclosure should be made. But it is oftentimes never that simple. One can conceive of a myriad of situations where it is unclear if the relevant information will have a material effect on the price or value of the securities. In such circumstances, leaving aside the fact that it may be prudent to take legal advice on the question whether disclosure should be made, the SGX Listing Rules also encourage issuers to consult SGX for guidance.
The writer is an associate director at Drew & Napier LLC