By Mak Yuen Teen
On 20 July, I posted an article called “DIY Rules on SGX” which talks about how some issuers seem to make up their own rules or interpret the SGX rules as they see fit – not what the SGX rules actually require. I have seen increasing instances of companies treating the continuous disclosure regime as a discretionary disclosure regime.
The latest example – and one of the most shocking I have seen – is the case of Raffles Education Corporation (REC). On 29 July, 5.39 pm, REC announced that the company and two of its subsidiaries in Malaysia, have been served with writs and statements of claims filed by Affin Bank Berhad on 27 May 2021 in the High Court of Malaysia. Affin Bank sought the immediate repayment of the entire outstanding amount of RM410 million – or approximately SGD131 million – under facilities entered into by REC’s two subsidiaries. This amount was more than half of REC’s market capitalisation of about SGD220 million just before the announcement. Not surprisingly, REC’s share price went into a free fall the day following the announcement, closing at 10 cents compared to the previous day’s closing price of 16 cents – a fall of 37.5%.
REC said that the announcement was issued “further to discussions between the Company and Singapore Exchange Securities Trading Limited (“SGX-ST”) and at the request of SGX-ST”. I would hope that in the discussions, SGX-ST had asked the board what it was thinking in withholding the announcement for more than two months and that it was more forceful than a mere request.
There is simply no excuse for the writs not to be disclosed on 27 May – and arguably before that when presumably letters of demand would have been received before the filing of the writs and statements of claims.
The board has attempted to justify not disclosing the writs earlier by saying that the two subsidiaries “have had discussions with Affin Bank prior to and immediately after its receipt of the Writs and had also sought advice from Malaysian legal counsels on the Writs (including the merits). Having regard to the foregoing, the Board is of the view that the actions brought, and claims, under the Writs are unmeritorious.”
In other words, the board seems to believe that disclosure is at its discretion or is a matter of business judgement. The board is wrong.
Chapter 7 of the SGX Rulebook on “Continuing Obligations” requires immediate announcement of material information. Rule 703(1) states that “an issuer must announce any information known to the issuer concerning it or any of its subsidiaries or associate companies which: – (a) is necessary to avoid the establishment of a false market in the issuer’s securities; or (b) would be likely to materially affect the price of value of its securities”. (emphasis mine).
Given that the writs involved amounts that are more than half of REC’s market capitalisation before the announcement, that information is clearly material. The fact that the share price has fallen 37.5% the day after the announcement merely serves to confirm what is obvious.
Rule 703(2) exempts from disclosure information which it would be a breach of the law to disclose and Rule 703(3) exempts from disclosure particular information if three conditions are met. Neither of these exemptions and the conditions stated under those exemptions would apply in this case.
Appendix 7.1 Corporate Disclosure Policy further reinforces that the information in this case should have been disclosed immediately. In particular, “material information” includes information “concerning the issuer’s property, assets, business, financial condition and prospects” and “dealings with employees, suppliers and customers”.
It further states that an issuer can rely on the exception under Rule 703(3) while each of the conditions are satisfied. If any of the three conditions cease to be satisfied, the exception will cease to be available, and the information must be disclosed immediately. As I have mentioned above, neither of the exemptions and none of the conditions specified in rules 703(2) and 703(3) would apply in this case, so there is no basis for not disclosing immediately.
In addition, para 8 of Appendix 7.1 specifically mentions “significant litigation” as one of the events which is likely to require immediate disclosure.
There is nothing in Chapter 7 or Appendix 7.1 that says that even if information should be disclosed pursuant to the rules, the issuer still has the discretion as to whether to disclose or not.
It turns out that the REC board had indeed chosen to interpret the rules as if it has the discretion. On 23 July, Mr Oei Hong Leong, a substantial shareholder of REC, wrote to the board highlighting the failure to disclose the lawsuit. He has since posted the letter on the “Save Raffles Education” website and it can be accessed here: https://save-raffles-education.com/failure-to-disclose-significant-litigation-affecting-raffles-education-corporation-letter-dated-23-july-2021/
While it appears that Mr Oei did not have all the information about the writs, he knew that it relates to claims by Affin Bank, a REC subsidiary, and that the amount was “more than RM300 million”.
The board’s reply to Mr Oei on 28 July, which he has also posted on the website (https://save-raffles-education.com/response-from-raffles-education-board-to-oei-hong-leong-and-oei-hong-leong-art-museum-letter-dated-23-july-2021-letter-dated-28-july-2021/), said that “the Board formed the view, based on the exercise of business judgement as well as legal advice from its Malaysian legal counsel, that the claims in the Litigation cannot be proceeded with and/or sustained. As you are aware, if a legal action taken against the Company could reasonably be characterised as being bound to fail, disclosure of the same may not be necessary. The company had amicably settled this matter with Affin Bank”.
I am certainly not aware that the SGX rules allow the board to exercise its discretion even when the information is clearly required to be disclosed under the rules. Affin Bank is a reputable bank in Malaysia and is unlikely to file unmeritorious claims that are “bound to fail”.
In its disclosure of the litigation on 29 July, REC said:
“The Board wishes to further update that the Company and the Borrowers have reached a settlement with Affin Bank on the amicable resolution of the matters under the Writs and understand that the Writs will be withdrawn upon the formalisation of such resolution….The Company will make further announcements as and when there material developments on the above matter, including if and when there is a formal withdrawal of the Writs by Affin Bank”.
Therefore, while the board had told Mr Oei in its reply that the company has amicably settled the matter with Affin Bank, the company’s announcement on 29 July indicates that there is no formalised resolution yet and Affin Bank has yet to withdraw the writs.
In his latest letter to the board on this subject on 30 July (https://save-raffles-education.com/raffles-education-corporate-failure-to-make-timely-disclosure-of-significant-litigation-letter-dated-30-july-2021/), Mr Oei has raised a number of legitimate queries which SGX should direct the company to respond to, as the market is clearly unnerved by the very late announcement that indicates that there is no certainty that the matter will be formally resolved. Further, this latest lapse adds to the concerns that have already been raised about how REC is governed and managed, and about its financial condition and prospects.
SGX Regco must act decisively and quickly and take action for the clear and serious breach in the listing rules by REC. MAS should also investigate whether there are breaches of the Securities and Futures Act with respect to the continuous disclosure requirement, and whether prior information disclosed by the company in light of this latest disclosure may be false or misleading.
Investors who have bought shares from May 21 until before the company’s announcement, and arguably before that when letters of demand may have been issued, may understandably feel aggrieved. They may well have a basis for a civil liability action against those responsible for the lack of timely disclosure.
