Coping with the increasing risks of directors’ & officers’ personal liability


Financier Worldwide Magazine

May 2015 Issue

May 2015 Issue

Directors and officers need to be alive to the risk of personal liability and must take active steps to manage those risks. In Hong Kong, such personal risks have greatly increased in recent years, as D&Os have been made subject to new regulatory obligations and as legislators have introduced new rights of action allowing claimants to bring civil claims.

Increased risks

The trends are well illustrated by the new regime for the disclosure of inside information under the Securities and Futures Ordinance and the new Competition Ordinance.

On 1 January 2013, provisions in the Securities and Futures Ordinance came into force which imposed a general obligation upon listed corporations to disclose ‘inside information’ – effectively price sensitive information which might affect the company’s share price – as soon as reasonably practicable after the inside information has come to the company’s knowledge. Importantly, the provisions also impose a duty on every officer of a listed corporation to ensure that proper safeguards are in place to prevent a breach of disclosure requirements, including appropriate internal control and reporting systems. In the event a listed corporation breaches the disclosure requirement, every officer whose intentional, reckless or negligent conduct has contributed to the breach, and every officer who has not taken all reasonable measures to put proper safeguards in place, will also be deemed to have breached the requirement.

The Securities and Futures Commission may commence proceedings against any corporation or officer who is suspected of breaching the disclosure requirements in the Market Misconduct Tribunal. The Tribunal has the power to impose various sanctions in the event that a breach is proved, including a disqualification order, a cold shoulder order and a regulatory fine of up to HK$8m. In addition, the new provisions provide that any person who is in breach of a disclosure requirement is liable to pay damages to any other person for any pecuniary loss sustained by that person, as a result, opening the door to civil claims against corporations and officers.

Similarly, the Competition Ordinance, which is likely to come into full force in the latter part of this year, prohibits parties from entering into arrangements and engaging in business practices that have the object or effect of harming competition. Examples include agreements between competitors to fix prices or share markets, and a company with substantial market power acting in such a way as to abuse that power. The Ordinance imposes very significant penalties on those who contravene the prohibitions. In the worst case scenario, the maximum fine can be up to 10 percent of the infringing undertaking’s Hong Kong turnover for a period of three years.

What is not well understood by many D&Os is that the penalties may be imposed not only upon an infringing company, but also upon any person that has been ‘involved’ in a contravention. This includes any person who is in any way, directly or indirectly, knowingly concerned in or a party to the contravention. Moreover, third parties that have suffered loss or damage as a result of a contravention may bring a civil claim to recover damages against such persons. Accordingly, a director or officer who approves an arrangement or practice which harms competition in Hong Kong may find themselves personally liable to pay significant fines and also defending civil claims brought by their competitors.

These, and other new legislation and regulations, have made the business world an increasingly dangerous place for the unaware and the unprepared. A slip up may put a director or an officer in grave financial jeopardy.

Counting the cost

Just how grave the financial jeopardy can be is illustrated by the proceedings brought by the Securities and Futures Commission against CITIC and five of its former directors. The case relates to an announcement made by CITIC on 12 September 2008, during the financial crisis. The announcement concerned a transaction and contained the standard language which generally appears in such announcements to the effect that “the Directors are not aware of any adverse material change in the financial or trading position of the Group since 31 December 2007…”

However, on 20 October 2008, CITIC issued a profit warning saying that it suffered a massive realised and market to market loss arising from a number of leveraged foreign exchange contracts which CITIC had entered into in order to manage the currency risk of its Australian iron ore mining project. The profit warning indicated that CITIC had become aware of the exposure arising from those contracts on 7 September 2008, before the earlier announcement had been issued. Following the profit warning, the price of CITIC’s shares fell 55 percent from $14.52 to close at $6.52 on 21 October 2008.

In September 2014, the Commission commenced proceedings in both the High Court and the Market Misconduct Tribunal against CITIC and the directors, alleging that they had engaged in market misconduct involving disclosure of false or misleading information, by using standard language in the announcement of 12 September 2008. The Commission is seeking restoration or compensation orders requiring CITIC and the directors to restore up to 4500 investors who bought CITIC shares after market close on 12 September 2008 and before 20 October 2008, to their pre-transaction positions or pay compensation for their losses. Some estimates place the former directors’ potential liability at HK$1.9bn.

Managing the risks

Managing the risks involves D&Os becoming well aware of their regulatory obligations and developing systems and procedures to ensure compliance. In doing so, D&Os must take into account the particular needs and circumstances of the corporation. Measures which should be considered include creating and documenting policies and procedures which are made available to employees; providing regular training to employees to help them understand the corporation’s policies and procedures, and the requirements which apply to the corporation; developing procedures to review regularly the corporation’s arrangements and business practices to identify any possible risks of non-compliance and any changes in the regulatory environment; appointing one or more officers or an internal committee to receive reports of non-compliance and to escalate any such information to the board where appropriate; and maintaining an audit trail of meetings and discussions concerning the assessment of any potential risks.

Last but not least, it is important for boards to consider the current coverage of their D&Os liability insurance and ensure that their plans are broad enough to provide real protection.


Nathan Dentice is a partner and Georgina Lau is an associate at Reed Smith Richards Butler. Mr Dentice can be contacted on +852 2507 9865 or by email: Ms Lau can be contacted on +852 2507 9467 or by email:

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