By Mak Yuen Teen

On September 21, 2020, Sabana Real Estate Investment Management Pte Ltd, the manager of Sabana REIT, issued an addendum to its 2019 annual report.

The crux of the addendum was to justify the re-designation of Ms Ng Shin Ein from a non-independent non-executive director to an independent non-executive director.

In FY2018 and FY2019, Ms Ng received payments from InfinitySub (a related corporation of the manager) for the divestment of all her shares in Blackwood Investment Pte Ltd to InfinitySub. This gave rise to a deemed business interest with InfinitySub under Regulation 13G(2)(b) of the Securities and Futures (Licensing and Conduct of Business) Regulations (SFLCBR) under the Securities and Futures Act.

Regulation 13G(2)(b) in essence states she would not be deemed independent if she is a substantial shareholder, director or executive officer of a for-profit corporation and has in the current or immediately preceding financial year made any payment to, or received any payment from, a “relevant person”, which includes a related corporation of the manager. Ms Ng was a non-executive director and shareholder of Blackwood, which held a 45% indirect interest in the manager that was sold to InfinitySub. She resigned as non-executive director of Blackwood  on October 25, 2019. About two months prior, she was appointed as a non-independent non-executive director of the manager. On November 1, 2019, she was re-designated from non-independent to independent.

The manager’s justified the re-designation of Ms Ng from non-independent to independent on the following grounds:

  • The payments received by Ms Ng from InfinitySub were for the divestment of her shares in Blackwood and following the last payment on August 30, 2019 for this divestment, there was no further payment from InfinitySub to her;
  • Ms Ng has ceased to be a director of Blackwood on October 25, 2019;
  • Ms Ng submitted her confirmation of independence;
  • Ms Ng fulfilled the requirements set out in the Code of Corporate Governance

Additionally, the Nominating and Remuneration Committee (NRC) and board of the manager had deliberated and approved her re-designation, with Ms Ng recusing, and the board was satisfied that she is able to act in the best interest of the unitholders of the REIT as a whole notwithstanding her deemed business relationship.

On (a), it should be noted that Regulation 13(G)(2)(b) refers to the “current or immediately preceding financial year” and the payments that Ms Ng received were within the period specified in the Regulation. The purpose of this regulation is to capture recent business relationships, not just whether there continues to be payments to her.

Submitting a self-confirmation of independence is useful if accompanied by full disclosure of any relationships which may affect, or be perceived to affect, the independence of a director, including relationships which may not be specifically captured by regulations, listing rules or the Code. The nominating committee (NC) can then use this to determine the independence of the director. But the self-confirmation itself is a matter of ownself confirming ownself as independent.

On Ms Ng fulfilling the requirements of the Code of Corporate Governance, it should be noted that while the Provision in the Code on independence no longer includes business relationships, with such business relationships now covered in Practice Guidance 2, the Practice Guidance refers to payments of $50,000 aggregated over any financial year where received by a director, in the current or immediate past financial year. In its addendum, the manager did not disclose how much Ms Ng received, so it is unclear if the “letter” of the Practice Guidance was complied with.

Independence is of course not just about compliance with the letter of the rules but the spirit. In this regard, Provision 2.1 states that “an ‘independent’ director is one who is independent in conduct, character and judgement, and has no relationship with the company, its related corporations, its substantial shareholders or its officers that could interfere, or be reasonably perceived to interfere, with the exercise of the director’s independent business judgement in the best interests of the company.”

Without transparency regarding how the price for the sale of Blackwood’s stake to InfinitySub was determined, stakeholders may find it difficult to be convinced that Ms Ng is now independent. I would also note that Provision 4.4 on the NC’s determination of independence of directors states that directors should disclose relationships, including business relationships, to the board. Footnote 15 states that this includes disclosing the amount of payments received. Did Ms Ng disclose this to the board? Further, the Provision states that if the board, on the advice of the nominating committee, still considers a director to be independent notwithstanding such relationships, the relationships and reasons should be disclosed in the annual report. For full transparency, I believe that the amount received by Ms Ng for the sale of her stake should have been disclosed.

The re-designation of Ms Ng from non-independent to independent on November 1, 2019 effectively meant that she went to bed on October 31 as non-independent and woke up the next day as independent. In my view, such re-designation is rarely credible if the director has a recent business or other relationship with the listed company, or in Ms Ng’s case, the manager, and there is no real break in this relationship.  In Ms Ng’s case, there was no meaningful break between her business relationship ending, and her appointment to the board and subsequent re-designation – in fact, she was appointed to the board on August 27, 2019 and received the final payment for the sale of her shares on August 30, 2019.

Further, her relationship with the manager goes further back. Ms Ng had served as a non-independent non-executive director for more than six years  since Sabana REIT’s IPO, before resigning in May 2017, citing “certain internal dynamics within the company”. In April 2011, Ms Ng bought a 10% stake in Blackwood, which had a 45% indirect interest in the manager. Therefore, Ms Ng’s relationship with the manager as a non-independent non-executive director dates back to 2010, and she acquired a 4.5% indirect stake in the manager in 2011. She bought a stake in the manager and not the trust, which meant that her interests are aligned with the manager and not unitholders. At the time of her re-appointment to the board in August 2019, her indirect interest in Sabana REIT, by virtue of her stake in Blackwood which held a 45% interest in the manager which in turn held a 1.01% stake in the REIT, was negligible.

Given that Ms Ng is legally trained and an experienced director, I am confident that she would not have given any undertaking to support the merger with ESR REIT that has proven to be highly contentious. Nevertheless, of all possible candidates in the market, why was she chosen given her long-standing relationship? What was the search and nomination process like?  All these, in my view, raise further questions about her independence.

I would add that the flexibility given by the regulations under both the SFA (for REITs) and Business Trust Act (for business trusts), which allows the board to deem a director to be independent notwithstanding the presence of relationships which may compromise independence, makes the determination of independence of directors rather nebulous. For listed companies, similar flexibility provided in the Code (except for relationships now covered in the listed rules) has led to the considerable scepticism about the true independence of independent directors. For REITs and business trusts, this flexibility creates even more concerns because directors are appointed by the shareholders of the managers, not the unitholders of the trust. Unitholders have no ability to appoint or remove directors, and at best, are just given a right to endorse them in five trusts here – and not Sabana REIT.

Finally, in Sabana REIT’s case, where questions about the independence of the directors becomes particularly pertinent given the proposed merger with ESR REIT, this episode will just give more ammunition to minority unitholders to question the merits of the merger and the independent directors’ support for it.