Updates
HK SFC Initiates Legal Proceedings Against SoftMedx Healthcare Limited and Former Directors for Breach of Fiduciary Duties
On 4 September 2024, the Hong Kong’s Securities and Futures Commission (HK SFC) commenced legal proceedings under section 214 of the Hong Kong’s Securities and Futures Ordinance (HK SFO) in the Hong Kong’s Court of First Instance, seeking disqualification orders against seven former directors and two former de facto directors of SoftMedx Healthcare Limited. The allegations pertain to breaches of fiduciary duties by these individuals during their time with the company.
The two former de facto directors named in the proceedings are Mr. Cho Kwai Chee and Mr. Ronnie Hui Ka Wah, both of whom are accused of managing the affairs of SoftMedx without formal appointment. This is the second legal action initiated by the HK SFC against Cho under section 214 of the HK SFO. The seven former directors include Mr. Chan Ka Chung, the former chairman and executive director, along with several former executive and independent non-executive directors of SoftMedx.
SoftMedx, formerly known as China Wah Yan Healthcare Limited, has been listed on the Main Board of The Stock Exchange of Hong Kong Limited (HKEX) since 29 October 1990. The company and its subsidiaries primarily engage in the distribution of medical equipment and products. In November 2017, the SFC suspended trading of SoftMedx’s shares pursuant to section 8(1) of the Hong Kong’s Securities and Futures (Stock Market Listing) Rules.
Both New Ray Medicine International Holdings Limited and Town Health International Medical Group Limited, the parties involved in the disputed transaction, are listed on the Main Board of the HKEX. Town Health is the parent company of Town Health Pharmaceutical, the vendor in the SoftMedx transaction.
Under section 214 of the HK SFO, the court has the power to disqualify individuals from being directors or participating in the management of any corporation for up to 15 years. This applies when individuals are found responsible for the company’s affairs being conducted in a manner involving defalcation, fraud, misfeasance, or other misconduct. The court may also issue any other orders it deems appropriate.
HK SFC has previously sought to disqualify Mr. Cho for allegedly breaching his fiduciary duties while acting as a de facto director of First Credit Finance Group Limited, a GEM-listed company. In the case of First Credit, legal proceedings commenced on 22 November 2023 against five former directors and a former de facto director, Mr. Cho Kwai Chee. The HK SFC alleges that from December 2015 to June 2017, Cho acted as a de facto director by making directorial decisions and participating in the management of the company without formal appointment.
Additionally, Cho and his brother, Kevin Cho Kwai Yee, were involved in a share placement and rights issue, which First Credit falsely reported as being subscribed to by independent third parties. HK SFC claims that the directors failed to disclose Cho’s de facto directorship and misrepresented his and his brother’s involvement in the share issuance. The directors breached their duties by not considering the dilution effect of the share placement on shareholders. HK SFC is also seeking an order to have the court’s findings published, ensuring shareholders are informed about these breaches.
The common thread between both cases is Mr. Cho Kwai Chee, who is alleged to have acted as a de facto director in both First Credit and SoftMedx, breaching his fiduciary duties in both instances. In each case, the SFC is seeking to disqualify him and other directors for their roles in misleading shareholders and failing to fulfill their obligations to the companies.
HK SFC’s investigation revealed that between August 2014 and June 2016, Cho and Hui acted as de facto directors of SoftMedx, taking part in the management of the company’s business. In June 2016, SoftMedx’s subsidiary acquired a 9.9% stake in New Ray Medicine International Holdings Limited for approximately $79 million from Town Health Pharmaceutical Limited, a subsidiary of Town Health International Medical Group Limited, where both Cho and Hui were directors.
HK SFC alleges that this transaction was not conducted at arm’s length, despite statements made by SoftMedx in its public announcements, which falsely claimed that the vendor and beneficial owner of the transaction were independent third parties. HK SFC asserts that there were no concrete plans to realize the purported benefits of the acquisition.
According to the HK SFC, Cho and Hui breached their fiduciary duties by failing to disclose their de facto directorships and by causing the company to publish misleading information regarding the independence of the vendor. They are also accused of placing themselves in a conflict of interest by promoting the transaction. The seven former directors of SoftMedx are similarly alleged to have breached their duties by approving and endorsing the dissemination of false and misleading information regarding the acquisition.
HK SFC is also seeking an order for SoftMedx to publish the court’s findings to ensure that shareholders are informed about the de facto directorships of Cho and Hui and the misleading disclosures made in the company’s public announcements.