Fri, Sep 28, 2018

What should you do when a director gets arrested?

On December 6, 2016, Pacific Radiance Limited (PRL), a company listed on the mainboard of the Singapore Exchange (SGX) announced that an executive director had been arrested by the Singaporean authorities on suspicion that he had committed an offence under the Prevention of Corruption Act (Chapter 241). The announcement stated that the director had been arrested and placed on bail on December 2, 2016 and that he had not been charged in court. Following the announcement, the share price of PRL fell from $0.155 to $0.146. The next day, the share price of PRL fell further to $0.14 amid relatively higher trading. This represents a fall of 9.6 percent in just two days

It could be concluded from the above that the information regarding the arrest was material to the price or value of the shares in the market. However, this is but only one of the many concerns that a company should consider when a director is arrested for criminal investigations. There are also other risks that a company should consider.

First, such events present a significant legal risk to a company. SGX’s listing rules appear to require that price-sensitive information be released on an immediate basis. Thus, if a listed company takes too long to release information regarding an arrest of a director, the company and its directors may fall foul of the SGX’s listing rules, which in turn, may result in disciplinary proceedings by the SGX — or worse, prosecution for breach of the Securities and Futures Act (Chapter 289). Such proceedings are typically long-drawn, as shown from the case involving Airocean Group, which only concluded in 2012, even though the original incident took place in 2005, by which time the company ceased to be listed on the SGX.

“Such cases can take a long time to resolve, and the spectre of prosecution can result in substantial uncertainty and lead to staff attrition”

Second, such incidents can present a significant operational risk to companies through a drain on manpower, as it is not uncommon for such cases to involve multiple employees from a single company and it is likely that employees may be repeatedly called up for investigations in the immediate or reasonably foreseeable future. Alternatively, employees allegedly involved in the event may have to be simultaneously placed on suspension pending the outcome of internal or external investigations, leaving the company with inadequate staff to operate. In addition, such cases can take a long time to resolve, and the spectre of prosecution can result in substantial uncertainty and lead to staff attrition. Hence, it may be prudent to conduct internal investigations promptly (especially with the assistance of external professionals), with a view to making a definitive decision on the employment status of the employees before the investigations even conclude.

Lastly, arrests of employees and executives can severely impact the reputation of the company. This in turn can adversely impact business operations, for example if credit facilities are withdrawn. Also, customers and other stakeholders may turn away out of fear of being tainted by association with the company. As such, companies should consider conducting internal investigations with a view towards publicizing key findings of such investigations, to assuage the concerns of the public and allow the business to move on.

The above risks are not exhaustive and differ from case to case depending on the nature of operations of a company. Also, such incidents do not frequently occur and companies are often ill-equipped to deal with them. Hence, should such situations arise, companies should not hesitate to seek professional advice, lest they be blindsided by issues which they failed to foresee.

This article was first published by Asian-Mena Counsel, magazine for the In-House Community.

Compliance Risk and Diligence

The Kroll Investigations, Diligence and Compliance team partners with clients to anticipate, detect and manage regulatory and reputational risks associated with global ethics and compliance obligations.