Updated on December 28, 2019 at 5.45 pm

By Mak Yuen Teen

I applaud the swift response of SGX Regco to questions I had raised on Christmas eve regarding (a) the appointment of Mr Chng Hee Kok as independent director at Metech International; (b) the independence of the sponsor RHT Capital from Metech; and (c) the failure to disclose the reprimand imposed by SGX on Mr Simon Eng at Advanced SCT (now Citicode) in Metech’s 2019 annual report as required for his re-election at the company’s October 2019 AGM.

What is particularly praiseworthy about the immediate action taken by SGX Regco is directing the company to convene an EGM and re-seek the re-election of Mr Eng, given that the information disclosed was “inaccurate and incomplete”. The disclosure lapse ought to have a consequence.

This EGM should be convened as soon as possible as Mr Eng was re-elected on “inaccurate and incomplete” information and in my view, acting as director and chairman without a proper mandate.

Of course, Metech shareholders may not be happy about the additional costs that the company will now have to bear. Given that this is an unnecessary EGM which is the result of a lapse, perhaps Mr Eng and the directors will consider paying for the costs of the EGM from the fees due to them. Under section 176(4) of the Companies Act, if directors fail to convene an EGM in accordance with section 176 and requisitioning shareholders convene it themselves, any reasonable expenses are to be paid out of the fees or remuneration due to the directors. Perhaps something similar should be considered for the listing rules when companies breach rules and have to convene unnecessary EGMs.

I am also pleased that SGX Regco is looking further into the various issues raised in my post.

Metech’s responses to SGX Regco’s queries dated December 27, 2019 on the matters raised are in my view unsatisfactory.

In query 2, SGX Regco asked about the NC’s assessment of Mr Chng’s ability to commit time and resources given that he serves as a director on 8 other listed boards. The company essentially gave the same explanation as it did in his appointment announcement, except adding that Mr Chng will now write to the other boards to seek their concurrences for him to join Metech (which SGX Regco has directed be done).

It is, however, not only the time commitment but the fact that Mr Chng has a prior conviction under the Companies Act and a warning under the Prevention of Corruption Act. Although this was in 2007, it is nevertheless important for the NC, board and the continuing sponsor to have considered this matter and whether other candidates should be considered for appointment. The response shed no light on this at all.

SGX Regco should also validate the sponsor’s responses on this matter and review the process that the sponsor followed, to determine if the sponsor merely accepted the NC’s assessment or whether it raised any queries. The sponsor should clearly not just rubber stamp whatever the NC or board says.

In query 4, SGX Regco asked the sponsor to confirm and provide the basis for their independence from Metech. I had raised the issue that two of Metech’s independent directors are also directors of a company within the RHT Group. The sponsor confirmed its independence and absence of conflicts of interests from all its sponsored issuers, by citing five factors, and adding that RHT Capital and all subsidiaries under the RHT Group “are independent of one another with different business models and operate differently”. It cited existing procedures and controls to mitigate conflicts of interests, twice.

What are these existing procedures and controls?

The fundamental question remains: Is RHT Capital in a position to provide an objective opinion about the suitability of directors for its sponsored issuers if those directors serve on boards of companies within the RHT Group? Would it be in a position to “blow the whistle” to SGX Regco on any breaches of rules if directors on boards of companies within the RHT Group are on boards of its sponsored issuers?

Would they be perceived to be able to do so, even if RHT Capital asserts that its objectivity will not be impaired?

The independence of a sponsor from the sponsored issuer is arguably just as important, if not more so, than the independence of an external auditor from an audit client.

SGX Regco should review its guidelines on independence for sponsors. It may wish to consider the rules for sponsors for GEM in HK, which refers to the “sponsor group” and not just the sponsor – and “sponsor group” includes fellow subsidiaries, among others.

Finally, on query 5, SGX Regco asked the company to explain and elaborate on the “negative confirmation” for Mr Simon Eng which was clearly wrong. In a corrigendum to the 2019 annual report issued on December 27, 2019, it turned out that not only was the reprimand he received at Advanced SCT in October 2015 omitted (which I had pointed out), a warning letter he received from the Monetary Authority of Singapore in 2014 for late disclosure of his change in interest at Teledata following a placement by that company was also not disclosed.

The company said that the rule was amended in January 2019 and that Mr Eng “who was clearing the Company’s Annual Report 2019” was “focused on ensuring the facts and figures in the Annual Report were accurate therein and had inadvertently omitted the information required under Appendix 7F”. It said he will be mindful of regulatory changes when clearing future annual reports.

The Annual Report should be cleared by all the directors and should also have been reviewed by the company secretary and the continuing sponsor. Why didn’t any of them pick up this wrong disclosure?

The response suggests that these changes were new and Mr Eng was unaware of the regulatory changes.

Metech’s 2019 annual report for the year ended June 30, 2019 was dated October 1, 2019. In the 2018 Annual Report of Citicode – which was previously called Advanced SCT and which was where Mr Eng received his reprimand from SGX – the reprimand was disclosed on page 146 for exactly the same question. Citicode’s annual report was dated April 1, 2019. How can lack of familiarity with the recent regulatory changes be the reason for the wrong disclosure if it was disclosed in Citicode’s annual report dated April 1, 2019 and then omitted in Metech’s annual report dated six months later?

Hopefully, SGX Regco’s investigation of the matters raised will be swift as will any necessary enforcement action.

As I mentioned in my earlier post, investors should pay attention to the integrity, independence, competence and commitment of the board of directors because most corporate actions are approved by the board, and not shareholders. The 5-member board of Metech now includes:

  • Mr Eng, the controlling shareholder, chairman and CEO who had been reprimanded and warned by regulators, and then failed to make proper disclosures;
  • Mr Chng who had previously been convicted of an offence under the Companies Act and also received a warning, and now serves on the boards of 9 listed companies; and
  • 2 independent directors who have relationships with the continuing sponsor.

One of the 2 incumbent independent directors, Mr Chay Yiowmin, who is the lead independent director, was also an independent director of Advanced SCT from September 4, 2013 to May 31, 2015. Mr Eng had previously held the roles of chairman and CEO at Advanced SCT. Although Mr Chay joined that company after the events that led to the reprimand and left before the reprimand was issued by SGX, and was not reprimanded, it is clear that Mr Chay is well acquainted with Mr Eng.

Investors should carefully consider all the above factors and assess whether such a board is likely to be effective.