A recent ruling by Hong Kong regulators against Hontex, a high-tech fibre manufacturer, raises some interesting questions around the extent of D&O insurance.
I am indebted to Joseph Kwan of Deacons in Hong Kong for an interesting regulatory alert recently.
The update related to an order made by the Courts in Hong Kong against Hontex International Holdings Company Limited, which required them to buy back HK$1.03bn, (approx. US$130m) as a result of false and misleading information in a prospectus.
The Securities and Futures Commission in Hong Kong ordered Hontex to make a repurchase offer to some 7,700 investors who had subscribed for Hontex shares in an initial public offering in December 2009 or who purchased them in the secondary market.
Although Hontex disputed the extent to which information in the Prospectus was materially false and misleading, they did acknowledge there had been failures amounting to a breach of the relevant Hong Kong Ordinance which imposes criminal liability on any person who intentionally or recklessly discloses, circulates or disseminates information that is false or misleading.
The criminal offence in Hong Kong is very similar to its equivalent in the UK. As is indeed the power under the Securities and Futures Ordinance enabling the authority to require the issuer to re-purchase shares based on a materially false and misleading prospectus. This is similar to equivalent powers here in the UK under the Financial Services & Markets Act.
The Insurance Impacts
Although named directors have not yet been involved in the proceedings, the story is not yet over. It seems that the SFC have expressly reserved the right to bring criminal proceedings against Hontex and its directors.
The case also gives rise to some potentially interesting insurance coverage issues, although it is not known whether any D&O insurance is in place.
Coverage questions might include:
- Whether the order to repurchase constitutes “damages” and hence “loss” within the meaning of any relevant policy (assuming either that there is entity cover and/or individual directors are or have become embroiled in these proceedings)
- Whether and to what extent Hontex’s admission as to the nature and extent of some of the errors in the prospectus would operate so as to disentitle Hontex and/or its directors to cover in respect of any defence or any investigation costs
- Whether the fact that the repurchase orders were made by agreement some 12 days into the trial would be regarded or relied upon by insurers prejudicing their position in the event of future coverage claims
- Whether the insurance policy would respond to cover the SFC’s own not inconsiderable costs of HK$7m.
As always, the answers to these and other questions lie (together with the devil) in the detail of the terms and conditions.