The following discusses the potential liabilities which the directors of a company listing on the Stock Exchange of Hong Kong Ltd. (the “HKSE”) and others may face in connection with any untrue statement contained in, or any material omission from, a prospectus issued in relation to the listing.
Potential Hong Kong prospectus liabilities arise under:
- the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32 of the Laws of Hong Kong) (“C(WUMP)O”);
- the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) (the “SFO”); and
- common law.
It is important to note that liability, as described in this memorandum, may also arise in respect of documents other than the prospectus, such as financial promotions and advertisements. Liability may also arise in respect of oral presentations made by or on behalf of a company.
This memorandum relates to the laws of Hong Kong and the requirements of the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Ltd. (the “Listing Rules”) and does not deal with the laws or regulatory requirements of any other jurisdiction. It does not constitute a comprehensive guide to potential liabilities and should not be relied on as a substitute for specific advice in relation to any particular transaction.
II. CONTENTS REQUIREMENTS OF A PROSPECTUS
A prospectus is required to comply with C(WUMP)O and the Listing Rules. The detailed contents requirements for a prospectus are contained principally in the Third Schedule to C(WUMP)O and in Part A of Appendix 1 to the Listing Rules.
In addition to the specific requirements of the Listing Rules and C(WUMP)O, the Listing Rules provide for an overriding duty of disclosure. Main Board Listing Rule 11.07 requires a prospectus to contain: “such particulars and information which, according to the particular nature of the issuer and the securities for which listing is sought, is necessary to enable an investor to make an informed assessment of the activities, assets and liabilities, financial position, management and prospects of the issuer and of its profits and losses and of the rights attaching to such securities.” C(WUMP)O contains a similar overriding disclosure requirement which is discussed further below in relation to Sections 38 and 342 of C(WUMP)O.
One of the specific requirements of the Listing Rules is that a prospectus must contain a responsibility statement in the following form: “This document for which the directors of the issuer collectively and individually accept full responsibility, includes particulars given in compliance with the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited for the purpose of giving information with regard to the issuer. The directors, having made all reasonable enquiries, confirm that to the best of their knowledge and belief the information contained in this document is accurate and complete in all material respects and not misleading or deceptive, and there are no other matters the omission of which would make any statement herein or this document misleading”.1
The directors of an issuer will also be required to sign individual responsibility letters accepting responsibility for the prospectus and related documents. Such acceptance of responsibility may give rise to personal liability for directors in the event of an inaccuracy in, or omission from, the prospectus.
If at any time after the issue of the prospectus and before dealings in the company’s securities commence, the issuer becomes aware that:
- there has been a significant change affecting any matter contained in the prospectus; or
- a significant new matter has arisen, the inclusion of information in respect of which would have been required to be in the prospectus if it had arisen before the prospectus was issued,
the company may be required to publish a supplementary prospectus and the directors must inform the company and the sponsor forthwith of any such change or new matter of which they become aware.
III. HONG KONG COMPANIES (WINDING UP AND MISCELLANEOUS PROVISIONS) ORDINANCE
The provisions relating to prospectus liability in relation to Hong Kong incorporated and overseas incorporated companies are set out in Parts II and XII, respectively, of C(WUMP)O.
1 Civil Liability
1.1 Sections 40 and 342E: Civil Liability for Misstatements in Prospectus
Section 40 of C(WUMP)O sets out the following list of persons who are liable to pay compensation to all persons who subscribe for shares on the faith of a prospectus for the loss they have sustained by reason of any untrue statement (being a statement which is misleading in the form and context in which it is included or a material omission2) (“untrue statement” ) in a prospectus:
- the directors of the company at the time of issue of the prospectus;
- persons who are named in the prospectus as directors or as having agreed to become directors and who have authorized themselves to be so named;
- a promoter of the company; and
- any person who has authorized the issue of the prospectus.
Section 40 applies to Hong Kong companies and, by virtue of Section 342E, to overseas companies.
An expert is only liable in respect of an untrue statement made by him as an expert and is not otherwise regarded as having authorized the prospectus.3 Otherwise, as acknowledged by the Hong Kong Securities and Futures Commission (“SFC”) in its 2005 Consultation Paper4, there is uncertainty as to who will be considered to have “authorized the issue of the prospectus”. In setting out proposals to remove the liability of persons who “authorize the issue of a prospectus” in that Consultation Paper, the SFC stated that the expression “creates uncertainty as to whether major shareholders, guarantors and other persons indirectly associated with the offering will have responsibility for the prospectus”. Whether any person has authorized the issue of a prospectus is likely to be a question of fact and depends on the circumstances of the case.5
Consultation conclusions6 published by the SFC on possible reforms to C(WUMP)O prospectus regime proposed to define more clearly the persons responsible for prospectus disclosures. It was proposed that “promoters” and persons who “authorize the issue of a prospectus” should be removed from the list of persons liable for prospectus misstatements and that civil liability should be extended to: (a) the issuer and/or offeror of the shares or debentures; and (b) each person who accepts, and is stated in the prospectus as accepting, responsibility for, or any part of, the prospectus. These amendments have not however been implemented.
As regards the position of IPO sponsors, the SFC considers that they are within the category of persons who “authorize the issue” of a prospectus and are thus are potentially subject to civil and criminal liability for prospectus misstatements under Sections 40 and 40A of C(WUMP)O7.
Scope of the offence
“Persons who subscribe for any shares or debentures on the faith of a prospectus” are defined8 to include: (a) persons who subscribe for or purchase shares or debentures pursuant to an offer in a prospectus; (b) persons who by means of an agent acquire shares or debentures pursuant to an offer in a prospectus; and (c) persons who acquire shares or debentures pursuant to arrangements between: (i) the issuer or vendor of the shares or debentures; and (ii) intermediaries appointed for the purposes of an offer. Section 40 thus applies to prospectuses making an offer for subscription or an offer for sale. The section also applies whether persons subscribe or purchase directly or whether they instruct an agent or intermediary to apply for shares on their behalf.
The class of persons who can claim compensation under Section 40 is however limited to persons who acquire in the primary market. The SFC proposed in 20059 to extend the class of persons who may claim compensation for a misstatement in a prospectus to subsequent purchasers who buy in the secondary market. However its consultation conclusions10 noted concerns expressed by respondents to the consultation and it was decided that the proposal would not be adopted. Secondary market purchasers who suffer loss as a result of an untrue statement in a Hong Kong prospectus are therefore not currently entitled to seek compensation under Section 40 of C(WUMP)O.
A person will not be liable under Section 40 if he can prove any of the following:
- that, having consented to become a director of the company, he withdrew his consent before the prospectus was issued, and it was issued without his authority or consent; or
- the prospectus was issued without his knowledge or consent, and upon becoming aware of its issue, he promptly gave reasonable public notice that the prospectus had been issued without his knowledge or consent; or
- after the issue of the prospectus, but before the allotment of shares, he withdrew his consent to the prospectus upon becoming aware of the untrue statement and gave reasonable public notice of his withdrawal of consent and the reasons for it; or
- in respect of every untrue statement not purporting to be made on the authority of an expert or a public official document or statement, he had reasonable grounds for believing, and did believe up to the time of allotment, that the statement was true; or
- in respect of every untrue statement by an expert, he had reasonable grounds to believe, and did believe up to the time the prospectus was issued that the person making the statement was competent to make it, and that expert had given consent to the issue of the prospectus containing his statement and had not withdrawn such consent before delivery of the prospectus for registration, or, to the defendant’s knowledge, before allotment; or
- in respect of every untrue statement which purports to be a statement of an official person or which is a statement contained in a copy of or extract from a public official document, the untrue statement was a correct and fair representation of the official statement or a copy of or extract from the document.
An expert who has consented under Section 38C to the inclusion of his statement in a prospectus will not be liable under Section 40 if he proves that he:
- withdrew his consent in writing before delivery of a copy of the prospectus for registration;
- on becoming aware of an untrue statement after delivery of a copy of the prospectus for registration, withdrew his consent in writing and gave reasonable public notice of the withdrawal and of the reason therefore; or
- was competent to make the statement and had reasonable grounds to believe and did believe up to the time of the allotment of shares or debentures, that the statement was true.
2 Criminal Liability
2.1 Sections 40A and 342F: Criminal Liability for Misstatements in Hong Kong Prospectus
Under Section 40A (Section 342F for overseas companies), any person who has authorized the issue of a prospectus containing any untrue statement (as defined above) may be liable to imprisonment and a fine, unless he proves either that the statement was immaterial or that he had reasonable grounds to believe and did up to the time of the issue of the prospectus believe that the statement was true.
The directors of a company who have approved the issue of a prospectus will most likely be regarded as having authorized it. As noted in respect of Section 40 above, there is however considerable uncertainty as to who will be regarded as having “authorized the issue of a prospectus”. However, an expert who has consented to the inclusion of his report in a prospectus is not regarded as having authorized it.11
2.2 Sections 38 and 342 of C(WUMP)O: Non-compliance with Prospectus Requirements
Section 38 and, in respect of overseas companies, Section 342 specify certain requirements for prospectuses including that they must contain the information specified in Part I of the 3rd Schedule to C(WUMP)O and the reports specified in Part II of that schedule and must be issued in English and Chinese. The information required to be included in a prospectus by Part I of the 3rd Schedule includes “sufficient particulars and information to enable a reasonable person to form as a result thereof a valid and justifiable opinion of the shares or debentures and the financial condition and profitability of the company at the time of the issue of the prospectus taking into account the nature of the shares or debentures being offered and the nature of the company, and the nature of the persons likely to consider acquiring them”.
The issue of a prospectus that does not comply with Section 38 or Section 342 may result in the company and every person who is knowingly a party to the issue of the prospectus being liable to a fine. A person will have a defence if he is able to prove that he was not cognizant of the matter not disclosed or that the non-compliance arose from an honest mistake of fact on his part. A court may also excuse a person from liability if, in the opinion of the court, the non-compliance was in respect of matters which were immaterial or the non-compliance should reasonably be excused.
Sections 38 and 342 do not however apply to the issue of a rights issue prospectus or application form.
1 Appendix 1 to the Listing Rules at paragraph 2 of Part A.
2 Definition of “untrue statement” in Section 41A (Sections 343(2A) and (2B) for overseas companies).
3 Section 40(1) Companies Ordinance.
4 Consultation Paper on Possible Reforms to the Prospectus Regime in C(WUMP)O published by the Hong Kong SFC in August 2005.
5 Consultation Conclusions on Possible Reforms to the Prospectus Regime in C(WUMP)O published by the Hong Kong SFC in September 2006.
6 SFC’s Consultation Conclusions on Possible Reforms to the Prospectus Regime in C(WUMP)O (September 2006).
7 SFC’s Supplemental Consultation Conclusions on the Regulation of IPO Sponsors – Prospectus Liability (22 August 2014) at paragraph 12.
8 Section 40(7) and the Twenty-second Schedule to C(WUMP)O.
9 SFC’s Consultation Paper on Possible Reforms to the Prospectus Regime in C(WUMP)O (August 2005) at paragraph 17.
10 SFC’s Consultation Conclusions on Possible Reforms to the Prospectus Regime in C(WUMP)O (September 2006) at paragraphs 38 to 41.
11 Section 40A(2) Companies Ordinance.