This is the fifth, and concluding, part of the series on the Ezra group.
If the collapse of the Ezra group was purely about the drop in demand caused by a fall in oil prices and miscalculations by the board and management, we could file it under “business failure”, learn lessons and move on. However, there were lapses that are not so easy to ignore. Here are some that are evident just from the public information which I have used.
Photo by Orlando Pinto from FreeImages
Failure to Disclose Interests
On 27 March 2013, Triyards announced that it had incorporated SAV Land Pty Ltd in Western Australia. On 19 April 2013, it was announced that SAV Land had agreed to purchase a property Lot 5 Clarence Beach Rd from Henderson Supply Base Pty Ltd (HSB) for A$6.75 million in Triyard shares and cash. The announcement stated: “None of the directors or controlling shareholders of the Company has any interest, direct or indirect, in the Proposed Acquisition”.[1] This transaction was not completed by 31 December 2013 and an announcement about its termination was made on 3 January 2014.[2] No clear reason was given for the termination.
In July 2014, Triyards announced the incorporation of Triyards Strategic Investments (TSI) and Tiryards Strategic Vietnam (TSV), which purchased Strategic Marine (Singapore) (SMS) and Strategic Marine (Vietnam) (SMV) for A$23.3 million from Henderson Marine Base Pty Ltd (HMB).[3] The proposed acquisition was announced on 14 October 2014.[4] Again, the announcement said that no director or controlling shareholder has any direct or indirect interest, save for his/her shareholding in Triyards, if any. The acquisition was completed the day after it was first announced.
However, on 20 March 2015, Triyards issued a clarification saying that the board has been informed that Lionel Lee, the then non-executive chairman of the company, has a beneficial interest in all the shares of Geraldton Investments Limited, which held a 20% interest in HMB.[5] This disclosure lapse is arguably a breach of the listing rules and SFA. The earlier statement that no director has an interest was clearly false, and was issued by “by order of the board” chaired by the director who did not disclose his interest.
The board was clearly not aware of his interest at the time of the transaction, which suggests he did not disclose his interest to the board as required under the Companies Act, which requires disclosure “as soon as is practicable after the relevant facts have come to [the director’s] knowledge”. The clarification said that the “Board of Directors are of the view that the deemed minority interest held by Mr Lee in Henderson Marine Base Pty Ltd would not have any material impact on the Acquisition”. At that time, Lionel Lee still chaired the board that issued that statement – not that it makes any difference to the requirement to disclose under the Act in my view.
Given the disclosure of interest in HMB, did he also have an interest in the similarly-named HSB which was involved in the earlier aborted transaction in January 2014 mentioned above?
The above disclosure lapse was not an isolated incident. Also on 20 March 2015, Ezra issued a “clarification announcement” relating to an acquisition announcement made six years earlier – on 5 March 2009. The acquisition was of Admiralty Marine Services Pty Ltd by Lewek Ruby Shipping Pte Ltd, an Ezra wholly-owned subsidiary.[6] Lewek Ruby had since been transferred to EOL.
In the “clarification announcement”, Ezra said that the board has been informed by Lionel Lee, the Group CEO and MD, and his father Lee Kian Soo, a NED, that one of the vendors of Admiralty, Moonshine Investments International Limited, was wholly owned by an associate of the two Lee’s. Again, the earlier announcement in 2009 had failed to disclose this interest, and therefore the same questions about breach of listing rules, SFA and the Companies Act would arise.
As these are only the cases where the failure to disclose was revealed through the subsequent clarifications, we do not know if there are other cases of non-disclosure which have not been “clarified”.
Trading During Blackout Period
On 18 January 2016, a news report said that Lionel Lee had drawn the ire of Ezra investors because he sold more than 11 million shares held by his 100%-owned company Jit Sun Investments for S$913,341 on 12 January 2016, two days before Ezra announced a first quarterly net loss of US$55.3 million, a reversal from the US$54.4 million net profit a year ago.[7]
Even though Ezra had issued a profit warning on 8 January which said that the 1Q FY2016 results would show a net loss as compared to the profit recorded in the corresponding period of the previous financial year,[8] the market would not be aware as to how bad that loss may be. A swing from a US$54.4 million profit to a US$55.3 million quarterly loss is not a minor blip. Lionel is likely to possess inside information when his investment company sold those shares.
Further, the sale took place during the company’s “blackout period”. According to the “Securities Transactions” section in the Corporate Governance Report in Ezra’s 2015 annual report: “Dealings in the Company’s securities are prohibited one month prior to the release of quarterly and/or full year results.”[9]
If this does not constitute insider trading, the market should know why.
As an aside, with the discontinuation of quarterly reporting (QR) for most companies, one wonders how ready regulators are to monitor for insiders in non-QR companies trading on undisclosed inside information, especially when there are no more blackout periods around the quarter-ends. If an insider sells shares two days before a company announces a first quarterly loss and during the blackout period faces no consequences and there is no explanation as to why, ordinary investors will surely think twice about investing in companies here.
An Undisclosed Related Party Transaction?
Note 12 in EOL’s 2016 annual report, under “Trade and other receivables” states: “These amounts are unsecured, interest-free and repayable in cash on demand. Included in other receivables is an amount of US$3,500,000 relating to a refundable deposit paid to a company related to a director of the parent company”.[10] The 2015 annual report did not disclose any such refundable deposit.
This would suggest that there was a related party transaction with the director during that year (or in previous years but not highlighted in “other receivables” in earlier years). However, a review of EOL’s annual reports dating back to 2010 showed no disclosure of any related party transaction that appears to be in the nature of a refundable deposit paid to a company related to a parent company director.
Who is this director of the parent company (i.e., Ezra) who was paid the refundable deposit that was unsecured and interest free? What was the purpose of this refundable deposit? When was it disclosed, if at all? Was it repaid to the company?
What Now?
It seems that Ezra’s cash flow problems had started way before the crunch in the oil market. KGI Securities Singapore analyst Joel Ng noted that Ezra had been reporting negative free cash flows for 10 years, even when oil prices were above US$100 a barrel. This was said to be due to it taking up too much loans during the years when the oil industry boomed. Such problems only surfaced when the oil price fell. Persistent weak free cash flows within the group led to a “highly unsustainable” balance sheet, according to the analyst, who added that Ezra could have been able to manage with the market conditions if it had a healthy balance sheet.[11]
However, the collapse of Ezra, Triyards and EOL is arguably not just about falling oil prices, drop in demand or over-leverage. The listing of three companies within the group may just have multiplied the risks. Ezra was guaranteeing a lot of the debt incurred by its two listed subsidiaries and other group companies. Group companies entering into contracts guaranteed by the parent appears to be common. Creditors and investors should pay more attention to inter-company guarantees in company groups or companies controlled by the same people.
The founder and his son essentially controlled three listed companies through a minority controlling stake in one company, and at one time or another held, key board and management positions in all three companies. Triyards and EOL are chain listings – which investors need to be wary of – as they are essentially pyramid structures approved by stock exchanges. From investors’ standpoint, they increase the risk especially if the businesses of the different companies overlap or are highly inter-dependent.
Corporate governance was definitely an issue, with interlocking and interchangeable directors and management. Conflicts of interest are a concern, as such directors and management may be involved in companies with competing interests, even when they are within the same group. Directors and key management leaving when the companies were under financial stress – when good governance and management becomes particularly critical – made the companies more vulnerable. To be fair, we do not know whether they have already tried their best to steer the ship on the right course before deciding that it was in vain.
There are serious questions relating to the disastrous EMAS-Chiyoda Subsea JV, and other questionable decisions such as those relating to Perisai Petroleum Teknologi, including the JV. That’s why I called them Dis-Joint Ventures.
Based purely on public information, there were arguably failure to disclose material information on a timely basis, false or misleading disclosures, failure to disclose interests in transactions, insider trading, and failure to discharge directors’ duties.
There are also questions as to whether contract wins announced by the companies and the secondary listing of EOL just fifteen months before it started reporting quarterly losses lured investors into buying notes, convertible bonds and shares of the companies.
Would there be a post mortem and some measure of accountability from the regulatory perspective? I guess that would be up to the regulators and the kind of behaviour they would like to see in our market.
Note: This series of articles draws on certain parts of a case study written by Cliff Seah Wen Jie, Goh Mei Qi, Hu Jingyi, Kelsey Feng Qiqi and Liu Yuchen, BBA (Accountancy) students at NUS Business School, under the supervision of Associate Professor Mak Yuen Teen. It has been written solely from public information, including media reports.
ENDNOTES (Note: Draft only)
