Non-executive directors arrested – a common cause and cure


    The Business Times, 7 June 2024


    IN THE last few years, a string of listed companies have found themselves in trouble – first with the Singapore Exchange (SGX), then with the law.

    This has resulted in many non-executive directors (NEDs) on these listed boards encountering a situation that they must surely not have contemplated when they first agreed to join the board: being arrested for a possible crime.

    Leaving aside cases where directors face the full brunt of the law because of their own personal misconduct (such as insider trading, share-rigging or fraud-related offences), it used to be less common for NEDs to be held accountable for management failure.

    This is because NEDs are not employed by their companies and do not work there. As board members, they are expected principally to exercise supervisory functions by overseeing the roles of the chief executive officer and key management, who remain responsible for the day-to-day business and affairs of the company. This includes compliance with regulations, and in the case of a listed company, the SGX Listing Rules.

    Duty to announce material information

    Every listed company is required by the SGX Listing Rules to announce to the market any information that is likely to materially affect the price or value of its securities.

    If the listed company fails to do so in an intentional or reckless manner, not only will the company face criminal sanctions under the Securities and Futures Act (SFA), a director of that company may be found to be personally guilty of a criminal offence if such failure was attributable to any neglect on his part or was done with his consent or connivance. Such directors may face penalties of a fine not exceeding S$250,000 or imprisonment of up to seven years or both.

    There are other potential criminal offences under the SFA and the Companies Act if information released to the market is false or misleading or if the director fails to act honestly and use reasonable diligence in the discharge of the duties of his office.

    The common thread of non-disclosure of bad news

    Most of the recent cases where NEDs run afoul of the law involve deliberate non-disclosure of adverse information. The scenarios giving rise to potential non-disclosure offences have generally been factually dissimilar in most respects. But the common thread seems to have been a reluctance to announce materially adverse news to the market when such news first comes to light.

    Consider these cases:

    • In October 2020, five independent directors (IDs) of Eagle Hospitality Trust (EHT) were arrested on “reasonable suspicion” that disclosure requirements may have been breached. These may relate to EHT failing to promptly announce its failure to collect the full security deposits due under its master lease agreements.
    • In February 2022, five directors of Raffles Education were arrested for a potential offence relating to the late disclosure to the public of a lawsuit by Affin Bank for immediate repayment of a RM410 million (S$117 million) loan two months after being notified by the bank.
    • In November 2022, four IDs of Hyflux were charged in court for failing to disclose required information on its Tuaspring Integrated Water and Power Project.
    • In October 2023, eight former directors of Swiber were charged in court with “reckless non-disclosure” relating to Brunei Shell Petroleum having served a notice of termination on Swiber for its Champion Waterflood Project.
    • In February 2024, warrants of arrest were issued against two former IDs of YuuZoo Corporation who are based overseas, over alleged misleading financial reports that may have overstated revenue by up to US$18 million (S$24 million).
    • In March 2024, five directors of Cordlife were arrested for potential breaches under the SFA for disclosing the irregular temperatures of a cryogenic storage tank of the company only nine months after the board was first alerted.

    Despite the multivarious factual scenarios of the above cases, one suspects that the natural first instinct of most boards when encountering an unpleasant business development is to, not unsurprisingly, attempt to explore all means to push back against the setback, find ways to ameliorate the situation or even just do more fact-finding.

    The legal obligation to promptly update the market on the extent and nature of such bad news does not naturally surface as one of the more urgent priorities and is often resisted by management. However, these cases remind us that this should be top of mind for directors when they run a listed company. The prompt disclosure of material information is a necessary pre-condition for our public markets to operate efficiently and effectively.

    When in doubt…

    There are, of course, different ways to couch such detrimental developments in public announcements. Even if all the relevant facts are not immediately available or verifiable, a well-considered, preliminary and cautionary disclosure to the market may allow directors to avoid possible liability for non-disclosure further down the road. Such disclosures can always be made on a qualified basis and seek to provide a balanced picture of the measures being attempted to reduce the adverse impact of such developments.

    It can be seen that non-disclosure of material information can be one of the greatest risks that NEDs face on listed boards. For this reason, directors will be wise to observe the adage that, for listed companies, “when in doubt, disclose”.

    The writer is a vice-chairman of the Singapore Institute of Directors.