[SINGAPORE] After years of struggling with the Tuaspring project, Hyflux was ordered to be wound up in 2021, closing a critical chapter in one of Singapore’s most significant corporate collapses.
Along with about 34,000 retail investors who lost S$900 million on the company’s preference shares and perpetual securities, its lenders were also previously reported to have suffered close to S$1 billion in losses.
While the liquidators, on behalf of the company, filed civil suits against former chief executive Olivia Lum for over S$690.6 million and former auditor KPMG for over S$684.6 million, public prosecutors went after Lum and other key executives for allegedly not disclosing material information regarding the Tuaspring Integrated Water and Power Plant.
The charges
In the trial that opened on Aug 11, Lum, former chief financial officer Cho Wee Peng, and four independent directors – Teo Kiang Kok, Gay Chee Cheong, Christopher Murugasu and Lee Joo Hai – are contesting the charges under Section 203 of the Securities and Futures Act (SFA).
They are accused of intentionally failing to notify the Singapore Exchange (SGX) of crucial information about the Tuaspring project.
The prosecution argues that Hyflux won the tender for the project with a bid that priced the desalinated water at a loss. The project’s viability was allegedly contingent on a co-located power plant, which was to sell surplus electricity to the national grid. Revenue from this was meant to cover losses from the desalination plant.
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This pivot into the volatile energy market – a business in which Hyflux had no experience – was a fundamental risk that prosecutors say was not properly disclosed to retail and institutional investors who funded the project through a S$200 million preference share issue in 2011.
The law assigns different degrees of culpability for this alleged failure. Lum is charged with consenting to the non-disclosure, Cho for conniving in it, and the independent directors for neglect.
A second charge alleges that Lum and the four independent directors omitted the same material information in the offer prospectus for the preference shares in 2011.
The capital-raising exercise was therefore supported by a deliberate omission of material information regarding Tuaspring’s reliance on electricity sales and the associated risks from volatile power prices.
What is non-disclosure?
Under Rule 703(1)(b) of the SGX Listing Manual, a listed company is obliged to disclose information it knows about itself, its subsidiaries or associated companies if the information “would be likely to materially affect the price or value of its securities”.
According to the Singapore Institute of Directors, under Section 203 of the SFA, the intentional, reckless or negligent failure to notify the SGX of any such information is a criminal offence. Not announcing the material information immediately could create a “false market” in the trading of its shares.
A “false market” is one where investors trade on incomplete or misleading information.
The materiality test
For the prosecution to succeed in a non-disclosure action, the withheld information must be proven to be “material”.
Singapore courts apply a two-pronged test to determine this.
First, the information must prove to be “materially price-sensitive”, meaning it would likely cause a significant change in the price of the company’s securities. The impact of the non-disclosed information on the share price is evaluated over a reasonable period of time, and not just on the first trading day after the announcement is released, according to case study notes by Venture Law.
In the Hyflux case, the prosecution argues that revealing the Tuaspring project’s dependence on the volatile electricity market would have fundamentally altered its risk profile and negatively impacted Hyflux’s share value.
Second, prosecutors in non-disclosure cases must show that the omitted information is “trade-sensitive”, meaning it would likely influence a reasonable investor’s decision to buy, sell or hold the securities.
Prosecutors contend that knowing Hyflux was entering a new and high-risk industry to subsidise its core business would have influenced any investor’s decision.
Potential penalties
The SFA gives statutory force to the SGX’s rules on non-disclosure, making a breach a potential criminal offence.
If convicted of consenting to Hyflux’s intentional non-disclosure, each of the accused may face up to seven years’ jail, a fine of up to S$250,000, or both.
For making an offer of securities to the public with omissions about the electricity sales, Lum and the four independent directors could additionally face up to two years’ jail, a maximum fine of S$150,000, or both.
