The Airocean Case: Materiality Matters When It Comes To Director’s Duties

In a landmark decision handed down by the Singapore High Court, an independent director's conviction for market misconduct was overturned. As a result of this case, company directors are no longer in the dark about their disclosure obligations and duties under the Securities and Futures Act. Melissa Russell and Victoria Macgregor of Clyde & Co LLP Singapore (with assistance from Clasis LLC) shed light on the requisite thresholds that need to be crossed in order to impute liability upon independent directors.

The background

The recent decision on appeal to the Singapore High Court in Madhavan Peter v Public Prosecutor [2012] SGHC 153, decided by Judge Chan Sek Keong, highlights Directors' and Officers' disclosure obligations and illustrates the possible serious consequences of failing to fulfil those duties.

Airocean Group Ltd was a holding company for a number of air-cargo logistics companies. Its four directors were Thomas Tay (Tay) as CEO, Chong Keng Ban (Chong) as COO, Ong Seow Yong (Ong) and Peter Madhavan (Madhavan).

In early September 2005, Tay was questioned by the Corrupt Practices Investigation Bureau (CPIB) in relation to a suspected bribe paid to secure business for two of Airocean's subsidiary companies. Tay was later arrested, released on bail and his passport was impounded. All of the directors knew of the CPIB investigation. In late September, Chong sold two million shares in Airocean.

The Straits Times published an article about CPIB's investigation of Tay in November 2005. This prompted the directors of Airocean to release an announcement, via SGXNET, in an attempt to clarify the newspaper article. However, the announcement mentioned only CPIB's investigation of Tay and did not mention the CPIB's investigation of the two Airocean subsidiaries. After receiving advice from the Singapore Exchange, Airocean released a further announcement, clarifying that three of its directors had been questioned by the CPIB about the alleged bribe. But this statement did not mention that the CPIB questioned the directors of two of Airocean's subsidiaries. On 5 December 2005, Airocean's share price fell by 17.4 percent.

Test of materiality

The Court considered the legal test of materiality under the Securities and Futures Act (SFA). The SFA prescribes the continuous disclosure obligations and also regulates insider trading. The Court held that:

1. Failure to disclose (alleged breach of Rule 703(1)(b) of the Singapore Exchange Securities Trading...