By Mak Yuen Teen

Rule 703 of the SGX Rulebook for both Mainboard and Catalist companies requires the disclosure of material information on a timely basis and sets out broad principles governing such disclosure, with additional rules and guidance provided in Appendix 7A Corporate Disclosure Policy and Practice Note 7A Continuing Disclosure. In addition, Rule 704 requires  immediate announcement of certain specific information. One of the categories of specific information that requires immediate disclosure is in Rule 704(6)(a) which covers:

“(a) Any appointment or cessation of service of key persons such as director, chief executive officer, chief financial officer, chief operating officer, general manager or other executive officer of equivalent authority, company secretary, registrar or auditors of the issuer….”

Appendix 7.4.1 and 7.4.2 respectively also require certain information to be disclosed on the appointment and cessation of these individuals.

I know the rule well because it has its roots in one of the recommendations in my 2007 report on improving the implementation of corporate governance practices in Singapore, commissioned by MAS and SGX. In a study of director resignations between 2003 and 2004 by my student which I supervised, we found that at that time, no reason was given in two-thirds of the cases when a director resigned, while in a few cases, “personal reasons” were cited. Further, we found that a majority of the announcements were put under “Miscellaneous” and many were buried with other news announcements. As sudden resignations of directors are a possible red flag and relevant to investors, I made two recommendations relating to resignations of directors. First, that SGX should have a separate category for announcements of resignations of directors  and key officers, with reasons clearly stated. Second, independent directors who are resigning should be encouraged to privately communicate any concerns to the SGX or other regulators. At that time, there was a separate category for “Appointments” but not “Resignations”.

SGX implemented this and extended it to cover all cessations of key persons specified in Rule 704(6)(a), together with the cessation template that we see today.

The rule seems clear enough. When one of those persons mentioned in rule 704(6)(a) ceases service, it should be immediately announced. I had previously written about many companies only announcing a cessation on the last day of service of the individual, when a person has likely already tendered their resignation some time earlier. To me, cessation of those individuals listed can be material information and should be announced immediately once that fact is known. There is a risk of insider trading if the cessation of a director or key officer is not announced in a timely manner.

The template in Appendix 7.4.2 includes a question “Is the effective date of cessation known?” and if so, to specify the date. Clearly, the template envisages an effective date which may be different from the date of the announcement.

Following my earlier articles on the subject, SGX discussed this issue with continuing sponsors. In its Sponsors Dialogue FY2020 dated 12 November 2019, Listing Compliance of SGX set out the following recommended practice:

“1. Under Catalist Listing Rule 704(6), an issuer must immediately announce the appointment or cessation of Key Persons such as director, chief executive officer, chief operating officer, general manager or other executive officer of equivalent authority, company secretary, registrar or auditors of the issuer.

2. Issuers should make the cessation announcement of Key Persons as soon as there is agreement/certainty between the issuer and the resignee on his/her cessation. It is not reasonable to assume that this event is only triggered when the key person has departed.

3. Sponsor must be satisfied that announcements on cessation of Key Persons are prompt and are not delayed till close to, on or after the cessation date.

4. Sponsor must also be satisfied that the issuers have valid justifications for delays in making the cessation announcement.”

(emphasis is SGX’s)

To my knowledge, SGX has not had similar communications with Mainboard companies that do not have continuing sponsors regarding timely announcement of cessation. Some issuers and continuing sponsors do not seem to have received the memo from SGX.

Take the case of Catalist-listed Charisma Energy Services, which recently proposed to replace its external auditors, with Nexia TS taking over from KPMG. SIAS asked the company the following question: “Can the company (and the sponsor) help shareholders understand if the company has made the necessary announcement to update the market on the cessation of the auditors, as required by Rule 704(6)(a)?”

The company said: “As the disclosure was made in the AR2020 and the AR2020 was published on the SGXNet shortly after being notified by KPMG on 14 June 2021, the Company (together with its continuing sponsor) was of the view that such disclosure was sufficient to meet the disclosure requirements of Catalist Rule 704(6)(a)”.

The annual report and notice of AGM are dated 14 June 2021. The annual report states that KPMG had decided not to seek re-appointment at the AGM and that Nexia TS had agreed to be appointed. The notice of AGM includes a resolution to appoint Nexia TS as auditors. Both the notice of AGM and annual report were announced on SGX on 15 June 2021.

Surely the company would have been told much earlier by KPMG that it was not seeking re-appointment in order for it to be able to go through the process of selecting Nexia TS and make the necessary disclosures in the annual report and notice of AGM.

How can announcing the cessation of the auditors on 15 June 2021 when the auditors almost certainly communicated their intention to resign much earlier, and doing so through the annual report rather than through a separate SGXNet announcement,  be considered as meeting the disclosure requirements of Rule 704(6)(a)? I am shocked that the continuing sponsor, PrimePartners Corporate Finance, agreed that the disclosure complies with Rule 704(6)(a), since they reviewed the responses provided by the company to SIAS.

But Charisma Energy is not alone. On 19 July 2021, another Catalist company GS Holdings issued an announcement titled “Disclaimer of Opinion on Financial Statements and Other Updates”. On page 3, it was disclosed that Baker Tilly TFW LLP have expressed their intention not to seek re-appointment. The continuing sponsor in this case is UOB Kay Hian.  Again, is disclosing the cessation of the external auditors in this way in the spirit of Rule 704(6)(a)?

Will we revert to the days in the early 2000s when companies would bury all kinds of cessation announcements with other information in order not to draw attention to them?

There are other examples of issuers interpreting rules as they see fit. In another case, an issuer claimed that it did not need to announce the cessation of a Senior Vice-President of Finance who was described as having a role equivalent to that of a CFO because the issuer had appointed a new CFO. There is nothing in Rule 704(6)(a) that says there is no need to announce a cessation of a key person if a replacement is appointed, even if the person appointed as a replacement is more senior.

It is long overdue for SGX to take a firmer stand on timely disclosures that comply with both the letter and spirit of the rules for both Mainboard and Catalist companies, and not let issuers and sponsors make it up as they go along.