Hong Kong Court of Final Appeal clarifies scope of agency and non-financial advantages under section 9 of the Prevention of Bribery Ordinance
- You are an ex-director and majority shareholder of a listed company (“ListCo”). After you resign, you find out that ListCo is looking to sell a group company (“Company A”). You volunteer to help ListCo find a buyer. No contract is signed.
- Company A is owned by a wholly owned subsidiary (“Company B”) of ListCo, you are a director of Company B, and the buyer you introduced to ListCo is, in fact, owned by your nominee. In this scenario, the transaction becomes a connected transaction requiring disclosure to the stock exchange and that is subject to voting restrictions. However, you fail to disclose this. Instead, you persuade your co-director of Company B to issue Board Minutes authorising the transaction and confirming that that none of its directions had any interest in the transaction. In return, you give your co-director part of your shares in the ListCo. Is this failure to disclose your interest in a transaction an offence under section 9(3) of Hong Kong’s Prevention of Bribery Ordinance (“POBO”)?
By offering your co-director shares in the ListCo in exchange for her co-operation in publishing the false statement in the Board Minutes, you have in all likelihood committed the offence of offering a bride under section 9(1) of POBO. That is quite straightforward.
However, section 9(3) of POBO provides that it is an offence under POBO for an agent to intend to deceive its principal by using ‘any receipt, account or any other document’. On the assumed facts, have you deceived the ListCo? And if so, do you owe the ListCo any duty not to deceive it? Can you be an agent of a company with whom you have no pre-existing contract or legal obligation?
These were the two key questions which had to be answered by Hong Kong’s Court of Final Appeal (“CFA”) in the case of HKSAR v. Luk Kin Peter Joseph  HKCU 29642. Both were answered in the affirmative.
The CFA confirmed that, under Hong Kong law, a person who is in a position to act on behalf of another and voluntarily does so may assume fiduciary duties. No pre-existing contractual, legal or fiduciary obligation is required. Take for example a voting member of a country club. A voting member is not a representative of the club. However, when he proposes someone as a suitable candidate for full membership, the voting member becomes an agent of the Club as he is doing something in relation to the Club’s affairs. By choosing to get involved in another’s affairs, he came under a duty to do so in good faith and not to exploit his position to obtain a bribe. Accordingly, on the facts, as soon as Luk agreed with ListCo to help it find a buyer for Company A, a reasonable expectation was created that he would act in the interests of ListCo to the exclusion of his own interest, and to act in good faith. That was sufficient to make Luk an ‘agent’ of ListCo for the purposes of section 9(3) of POBO, even if he had no contractual relationship with the ListCo.
The Board Minutes of Company B, whilst not a receipt or account, fell within the category of ‘any other document’ because this was a document in which the principal (i.e. Company A) was interested and which contained false or erroneous statements intended to deceive. Luk knew that various reporting obligations under the Listing Rules would be triggered if his interest in Company B was disclosed. Therefore, by providing Company A with Board Minutes of Company B which did not disclose Luk’s interest in the buyer, Luk intended to deceive Company A and Company B, thereby committing an offence under section 9(3).
An interesting defence that was run by Luk was that he had “permission” from Company B to bribe his co-director and issue the false Board Minutes. If, therefore, he was only an agent of Company B, he was acting within lawful authority and had a defence under section 9(1) of POBO. The Court of Appeal dismissed this arguing, holding that the knowledge of Luk and his co-director cannot be attributed to Company B, let alone treated as a grant of permission. In the Court of Appeal’s words:-
“In the case of section 9(1) and (2) of the Ordinance, it would be absurd to hold that the knowledge by the directors of their own breach of duty to the company by giving and taking a bribe was to be attributed to the company. That would defeat the purpose and policy of the rule. “
How this decision affects you
This decision illustrates the broad scope of ‘agency’ under POBO. Individuals and companies alike need to be aware that they could assume obligations towards a third party if they are acting in respect of that third party’s affairs, even if there is no contractual relationship.
For private and listed companies, this decision highlights the importance of having in place adequate internal policies on disclosure of interests by employees. This takes on further importance in the context of the new ‘Manager in Charge’ regime, introduced by the Hong Kong Securities and Futures Commission (“SFC”) to increase the accountability of senior management personnel of licensed corporations, which will come into force on 18 April 2017.
This article should not be used as a substitute for taking legal advice in any specific situation. Ince & Co accepts no responsibility for any action taken or not taken in reliance on it.