How should a board respond when its members are under a criminal investigation?

WHEN a board member is under investigation for an offence or is arrested, the impact on the board and the company can be enduring, detrimental and sudden. Whether the director's misconduct is intentional or not, a shadow of impropriety can be cast on the board and the company, especially where the misconduct is in relation to the activities of the company.

Take the case of Eagle Hospitality Trust and Raffles Education Corporation, when their non-executive directors were arrested in connection with the suspected commission of offences under the Securities and Futures Act. While none of these directors has been charged with any offence to date, these cases throw a spotlight on the issue of how a company should respond to investigations by the authorities.

At times, the board can also be unwittingly dragged into an unfortunate situation where a director is under investigation for matters relating to his activities as a member of another company's board. Although formal arrests and being released on bail do not necessarily mean that the director will eventually be charged with any criminal offence, ineffective responses to the situation may cause harm to the company's reputation, loss of investor confidence or shareholder lawsuits.

What should a board do when a director is investigated by the authorities? A distinction needs to be drawn depending on whether the investigation relates to the director's involvement with the activities of the company itself, or his activities outside the company (for example, in relation to another company of which the director serves as a board member).

A company should immediately seek legal counsel upon becoming aware of any investigation into 1 of its directors.

Full cooperation with investigations

When the activities of a company are under investigation, the authorities may invite current and former directors for interviews to assist in investigations as witnesses or as accused persons under the Criminal Procedure Code. Companies should have in place internal regulations requiring directors to inform the board of any interviews with authorities and to update the board on developments in investigations.

Upon request from the authorities, the company may have to provide internal documents, such as accounting and corporate records, to assist in the investigations.

It is important that the board and the company fully cooperate with investigations. Failure to attend interviews or furnish documents can carry penalties such as imprisonment and fines.

Public disclosure

Under SGX Listing Rules, particularly Practice Note 7.1, the company should immediately disclose material information which is trade-sensitive or materially price-sensitive. Investigations by the authorities, which include requests to produce documents, attend interviews, or surrender passports, would fall under such material information. To decide how much information is to be disclosed, the board should consider, amongst others:

(a) the materiality of the information to the company's affairs;

(b) the bearing that the information has on the accused director's character and integrity; and

(c) the severity of the potential breach or offence.

If a company fails to publicly disclose relevant information as required, the Singapore Exchange (SGX) may take disciplinary action against the company and its directors. Being transparent with the disclosure of relevant information is crucial because the public will be scrutinising how effectively the company and the board handle the arrest or investigation of a director. Responding appropriately will go a long way to preserving investors' confidence and maintaining the company's reputation.

Replacement as director

The company may want to appoint a special committee to independently look into the events giving rise to the investigations, particularly if they are related to the company or its business. Nominating committees (NCs) must continuously assess the accused board member's suitability to remain as a director.

If the board does not think that additional measures need to be implemented, reasons should be provided in the announcement. The SGX has the power to object to appointments and reappointments of individual directors who are under investigation. Additionally, SGX can direct a board member to resign. If the NC concludes that the director is not suitable for continued appointment, the company must announce the suspension or cessation of the director's service along with reasons supporting the decision.

The remaining board members not impugned in investigations may wish to consider delaying plans of resignation so as not to disrupt company functions or handicap the company's ability to investigate the matter. This is because appointing a new director in the midst of investigations will be disruptive and could pose difficulties for the company.

SGX may enquire why a director thinks it is appropriate to resign at the time that a fellow director is arrested or under investigation and the company is under scrutiny.

Apart from the legal and compliance issues involved, there are many difficult decisions to be made by unaffected board members and NCs. These require a director to put aside personal feelings or friendships and act in the best interests of the company.

This is the first of a 4-part series on criminal investigations and special audits.

The writer is a member of the Regulatory Affairs Committee of the Singapore Institute of Directors.

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