Disclosure-related duties of directors
AS A fiduciary, a fundamental duty of each director is to act in the best interests of the company. A key aspect of this duty is to avoid or deal properly and fairly with matters that present conflicts of interest.
In addition, directors must ensure material information is properly disclosed in a timely manner to the relevant parties, which includes the Singapore Exchange (SGX) for listed companies.
Board minutes must properly document these conflicted transactions. Other directors must also pay attention to these disclosures, and their responses must also be properly documented.
The recent cases of independent directors hauled to court for disclosure-related offences sent shockwaves to many independent directors.
Non-disclosure of material information
In November 2022, former Hyflux chief executive Olivia Lum was charged in court with disclosure-related offences under the Securities and Futures Act (SFA), along with former chief financial officer Cho Wee Peng and four independent directors.
The four independent directors face two counts each for their negligence. One count pertains to Hyflux’s failure to disclose required information on its flagship desalination plant Tuaspring, while the other is for the omission of those details from a 2011 offer information statement.
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Conflicts of interest
On May 17, 2023, the former lead independent director of Singapore O&G, Christopher Chong, was convicted of two counts of cheating under the Penal Code and sentenced to four years’ jail.
The conviction related to his failure to disclose that he would receive a S$1.5 million “introduction fee” from a business that the company was acquiring for S$26.5 million. The case is under appeal.
In February 2022, two former executive directors of Kimly were fined for failing to notify the SGX that the company’s acquisition of Asian Story Corporation (ASC) involved a conflict of interest.
Lim Hee Liat, former executive chairman, and Chia Cher Khiang, former executive director, were charged under the SFA for their failures to notify SGX that Kimly’s acquisition of ASC was an interested-person transaction.
Lim was also charged under the Companies Act for failing to disclose his 30 per cent stake in ASC. During board meetings deliberating on Kimly’s acquisition of ASC, both Lim and Chia (who was aware of Lim’s interest in ASC), did not disclose Lim’s interest in ASC to the board.
Subsequently, on Aug 22, 2022, Alain Ong, the former CEO of Pokka International, was fined S$15,000 and disqualified from acting as a director for a two-year period. Ong beneficially owned 40 per cent of the shares in ASC.
Pokka Corporation and Pokka International, its wholly owned subsidiary, entered into various agreements with ASC, but Ong did not disclose his partial beneficial ownership of ASC.
Independent directors, who typically have less connection with the day-to-day management of the business, tend to be less likely to be embroiled in conflicting situations than executive directors.
But as the Hyflux and Singapore O&G cases demonstrate, independent directors are not spared from scrutiny as the Companies Act and the SFA make no distinction between an executive and non-executive independent director on matters of liability.
Legal ramifications from non-disclosure
Independent directors need to pay attention to three different provisions where they could be charged for disclosure-related offences.
Firstly, under Section 156 of the Companies Act, directors and CEOs are required to disclose the nature, character and extent of their interests in transactions, or their holding of property or offices where a conflict of interest might arise, among other things, as soon as practicable.
The maximum penalty for a breach of Section 156 is one year’s jail or a S$5,000 fine. This applies to all companies in Singapore, whether listed or private.
Secondly, under Sections 203 and 331 of the SFA, a listed company and its directors must not intentionally, recklessly or negligently fail to notify SGX of information required to be disclosed under the listing rules. Those convicted can be jailed for up to seven years and fined up to S$250,000.
Thirdly, under Section 420 of the Penal Code, those convicted for cheating under this provision can be jailed for up to 10 years and fined.
Impact on independent directors
When directors are dealing with corporate opportunities and commissions, they must disclose their interest to the board. In the O&G case, the prosecutors noted that had the other directors known of the undisclosed conflict of interest, they would not have proceeded with the acquisition without further conditions or questions.
Boards should set out protocols, such as a Code of Conduct or guides to best practices that directors must comply with when faced with various specific scenarios involving a conflict.
If a director intends to recommend a particular strategy that might also involve a personal benefit, this must be disclosed to the board.
Human weakness is part of human nature. Everyone, no matter how upright, may be tempted to err. Directors should stay away from temptation so they do not need to face the consequences when things go awry.
The writer is a member of the advocacy and policy committee and the accreditation committee of the Singapore Institute of Directors
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