The dangers of non-disclosure: Criminal convictions on deceptive practices by a director of Hong Kong listed company

The District Court of Hong Kong had, on 9 December 2024, convicted Mr. Chim Piu Chun (Mr. Chim) and his son, Mr. Ricky Chim Kim Lun (Ricky Chim) on two counts of conspiracy to defraud Asia Resources Holdings Limited (currently known as Zhong Jia Guo Xin Holdings Company Limited) (the ListCo), its board of directors and shareholders, as well as the Stock Exchange of Hong Kong Limited (the SEHK)¹, in relation to an undisclosed "backdoor listing" transaction.

Mr. Chim and Ricky Chim, along with another defendant², were remanded in custody immediately, pending sentencing.

The case serves as a real-life reminder of the significance of full transparency towards the issuers, the boards and shareholders as well as the regulators in discharging duties as the directors of listed companies.

The Case In Brief

The ListCo is listed on the Main Board of the SEHK. Mr. Chim was a substantial shareholder, while Ricky Chim was an executive director and the chairman of the ListCo at the material time.

In July 2013, Mr. Chim and Ricky Chim privately agreed to a "backdoor listing" arrangement to sell the controlling interests of the ListCo to a buyer (the Buyer) for approximately HK$210 million, allowing the Buyer to acquire 70% to 75% of the ListCo's issued shares (the Agreement).

To implement the Agreement, Ricky Chim proposed a fund-raising transaction to the ListCo's board for the issuance of certain convertible notes (the Notes) and new shares by the ListCo (the Placing). The Placing was also subsequently approved by the ListCo's shareholders in October 2013 at a special general meeting. This fund-raising exercise resulted in the issuance of ListCo's shares representing more than 5 times of its then issued share capital.

Through a series of subscriptions, sales and purchases of the Notes and the ListCo shares by the nominees of the Buyer and Mr. Chim, the Buyer executed its the plan to gain control of the ListCo anonymously.

The proceeds from the Placing were allocated by the ListCo for the acquisition of a real estate project owned by the Buyer. This was later determined by the Court to be the Buyer's asset injection strategy, being part of the "backdoor listing" plan of the Agreement.

The Court's Judgement

Ricky Chim and Mr. Chim knowingly withheld the existence of the Agreement from the SEHK, the shareholders, and the board of the ListCo. This prevented the ListCo and its shareholders from properly evaluating the risks associated with the Placing, deprived the shareholders of an opportunity to realise their investments under a mandatory general offer and hindered the SEHK from performing its regulatory duties effectively.

The Court held that the two defendants conspired with the others to conceal the Agreement and the true purpose of the Placing, and convicted them on two counts of conspiracy to defraud.

Key Takeaways

While a "backdoor listing" itself is not an illegal transaction, the defendants' conspiracy to covertly execute the Agreement to circumvent regulatory requirements ultimately resulted in serious legal repercussions.

This case underscores the critical importance of full and frank disclosure by directors of listed companies. Failure to do so can result in severe criminal consequences, extending beyond mere monetary and regulatory punishments.

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