Response to consultation paper on enhancing continuous disclosure rules

Published January 20, 2018

By Mak Yuen Teen

I submitted my response to SGX on the consultation which closed on January 12, 2018. My response is at the end of this article. However, I would like to add some further comments especially with companies often seemingly complying with the letter of the listing rules but not the spirit.

When enforcing the listing rules on issuers, SGX must go back to the General Principles set out in Chapter 1 of the Listing Rulebook. These include:

a) Rule 103 which states: “This Manual seeks to secure and maintain confidence in the market. The underlying principles of the listing rules include the following: — (1) issuers shall have minimum standards of quality, operations, management experience and expertise; ….(3) issuers shall disclose information if a reasonable person would expect that information to have a material effect on the price or value of their listed securities; (4) all holders of listed securities shall be treated fairly and equitably; and (5) directors of an issuer shall act in the interests of shareholders as a whole, particularly where a director or substantial shareholder has a material interest in a transaction entered into by the issuer.”

b) Rule 104 which states “(1) The Exchange reserves the right to subject a listed issuer’s change in principal business to the Exchange’s approval if in the Exchange’s opinion:—(a) the integrity of the market may be adversely affected; or (b) it is in the interests of the public to do so.”

c) Rule 105 which states “…(2) An issuer admitted to the Exchange’s Official List must comply with the listing rules:—(a) In accordance with the spirit, intention and purpose; and (b) by looking beyond form to substance.”

It is fairly clear some issuers have been dancing around the strict letter of the listing rules and are not acting in accordance with the general principles I have highlighted above. This is particularly so in matters covered by chapter 7 on “Continuing obligations”, chapter 9 on “Interested person transactions” and chapter 10 on “Acquisitions and realisations”. For example, issuers may enter into interested person transactions involving parties acting in concert but are not caught because these parties do not meet the definition of “associates”.

A good example of a company which in my view has not complied with the general principles and spirit of the listing rules is Datapulse Technology.

How can a hastily constituted board, just one day after it was constituted, acquire a company in a new business which has essentially the vendor as the sole customer and without due diligence and using a valuation provided by the vendor and when the both controlling shareholder and CEO of the acquirer and the sole shareholder of the vendor are connected through various companies and have other associations? How is this different in substance from a situation where these parties are family members and are considered associates under IPT rules?

When an issuer buys a company which has a captive relationship with the vendor and says that it may consider acquiring or merging with the vendor later, isn’t there a risk that the acquirer is splitting up the acquisition to bypass the SGX rules on shareholder approval?

When something walks a duck, quacks like a duck and looks like a duck, it is not a chicken.

In what way have all shareholders  been treated fairly and equitably and in what way have the directors shown that they have acted in the interests of shareholders as a whole, as required under Rule 103? In what way has the issuer observed the spirit, intention and purpose of the rules and looked beyond form to substance as specified by Rule 105?

If such an acquisition is acceptable, then what are the general principles for?

Why should a board which has done such a thing be allowed to convene an EGM to approve its diversification into new businesses? Why shouldn’t SGX use Rule 104 to protect the integrity of the market and the public interest by rejecting the company’s proposal to diversify into new business areas until it is satisfied that the company has a board capable of doing the right thing for all shareholders and a properly considered diversification plan in place?

SGX must be prepared to take action or to block transactions that violate the general principles. In particular, they should be prepared to block transactions that clearly lack commercial substance. This is especially so in Singapore where shareholders face significant barriers to protecting their rights. And it should be prepared to take companies to task for violating the general principles, not just the letter of the rules. Otherwise, exhortations to issuers to observe the spirit of rules and to put substance over form just sound hollow.

Further, enforcement actions must be timely. If a director breaches the listing rules or laws and it takes many years for any action to be taken, can you imagine what further damage he can do in the intervening years?

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