By Mak Yuen Teen

On February 17, 2020, between 8.04 and 8.05 pm, Medtecs International issued seven announcements on disclosure of changes in interest for Xia Junwei, the deputy executive chairman of the company. These seven announcements relate to six share disposal transactions that resulted in Xia’s stake falling from 14.9% to zero.

According to all the announcements, the company was notified of the change in interest for Xia on February 14, 2020. It appears he had fallen out of love with the company. The shares were sold through a series of market transactions for $10,758,275 at an average price of $0.1314.  According to the disclosures, those six transactions occurred on January 30 (average price = $0.1820), January 31 ($0.1242), February 3 ($0.1273), February 4 ($0.1204), and the last two on February 6 ($0.0902, $0.1007) respectively. The disclosures stated that Xia became aware of all these transactions on February 6. Xia bought into the company in September 2015 at $0.07 for $5.7 million, so would have made a tidy profit in less than five years.

Xia was deemed interested in the shares held by DBS (Nominee) Pte Ltd. The announcements of the disclosure of changes in interest included the following explanations: “1. I have an open instruction to my staff Vivi Wu to liaise with DBS team to dispose my shares on 30 Jan”, 2. Vivi Wu is the authorized person to give DBS team instructions”, “3. I was informed by DBS on 6 Feb on the complete of disposal”.

Medtecs shares had started a price run-up on January 21 when they closed at $0.092 compared to $0.052 the day before, an increase of 77%. Its volume increased to more than 178 million shares compared to about 14 million the day before. The increase followed the announcement of the first confirmed cases of COVID-19 (Wuhan coronavirus) outside of Mainland China on January 20.

Medtecs describes itself as “a well-known healthcare products and hospital services provider and a leading manufacturer of reusable hospital apparel, disposable personal protective equipment (PPE) and workwear.” Clearly, the market was speculating that Medtecs might benefit from the sharp increase in demand for the types of products and services it offers. The share price peaked on January 29 at $0.21 before closing at $0.196 that day – an increase of 277% from January 20. It started falling the following day, reaching $0.076 at the close of trading on February  6.

In other words, Xia started selling his shares immediately after it peaked and continued selling until February 6. On February 7 – after Xia’s sales had been completed – Medtecs’ shares started to increase again and closed at $0.103, and reaching $0.113 at the close of trading on February 14. Following Xia’s notifications to the company after the close of trading on February 14 – when he disclosed that he had disposed of his entire stake of 14.9% through the six transactions – the share price closed down at $0.104 on February 18.

Medtecs was not queried about the sharp increase in price and volume, presumably because SGX took the view that the market was upbeat about Medtecs’ prospects given its business and the spread of the virus.

In my view, given that Xia is a director (and deputy executive chairman), his actions raise possible issues relating to insider trading, discharge of director duties and timely disclosures.

The regulator should examine whether Xia traded while in possession of material non-public information when he started selling his shares. As an executive director and deputy executive chairman, he is likely to have information as to whether Medtecs would be able to benefit from the surge in demand for healthcare products created by the virus. The regulators should also examine whether the board or management made any decisions on production plans to meet increased demand. There is also the possibility that others were aware of his share sales and sold too.

Alternatively, even if he was not trading on inside information, there is the question as to whether his actions contributed to the fall in the share price and hurt the interests of the company and its shareholders. It is possible that the share price might have continued to increase if he had not sold out of the company.

Of course, arguably the clearest breach is the late disclosure of the share disposals. All the transactions should have been notified to the company within two business days under the SFA. Instead, they were notified between 6 and 11 business days after transactions. The sanitised explanations provided by Xia do not mask the fact that the disclosures were late and not compliant with the SFA. The late disclosures went viral on social media as soon as the disclosures were made. Six late disclosures are clearly not isolated cases.

This case also highlights the importance of companies having robust share trading policies that require directors to inform the company of an intention to trade prior to the trading. Xia’s share transactions did not occur during the “blackout periods” around results announcements but there will nevertheless be questions as to whether he was trading while in possession of inside information. In fact, every time a director trades, that question will arise.

It also turned out that when Xia’s 14.9% stake, which was initially held directly by him, was transferred to DBS (Nominees) Pte Ltd on February 22, 2016, the change from direct to deemed interest was only notified to the company on March 23, 2016. It was stated that the announcement was prepared by the company and reviewed by the sponsor, R&T Corporate Services. Did the company secretary and sponsor advise Xia about his disclosure obligation, and was the sponsor expected to report it to SGX?

Speaking of the company secretary and sponsor, it turns out that the joint company secretary of Medtecs, Abdul Jabbar Bin Karim Din, is a partner at Rajah & Tann Singapore LLP and a director of R&T Corporate Services. R&T Corporate Services is the continuing sponsor of Medtecs. The two registered professionals for Medtecs are both also partners at Rajah & Tann Singapore LLP. In our recent article about sponsors’ conflicts, we had mentioned that we were particularly concerned about affiliates of sponsors providing services such as corporate secretarial or investor relations services to their sponsored issuers.

In Medtecs’ case, the latest annual report disclosed non-sponsor fees of $35,191 paid to Rajah & Tann Singapore LLP., which presumably is for the corporate secretarial services. But mere disclosure does not lessen the potential conflicts, especially in this case where the company secretary and the registered professionals are all partners at Rajah & Tann Singapore LLP, and the company secretary is also a director of R&T Corporate Services, which is the continuing sponsor.