Note: This post was updated on 25 December 2021 at 12 pm to provide more detail on what contributed to the change of fortunes in FY2019 for ASTI and DGI.
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On 23 December, I made a post titled “ASTI Holdings: A ‘Discounted’ Termination Payment?” where I questioned the payment of S$1,378,270 to ASTI’s executive chairman and CEO, Dato’ Michael Loh Soon Gnee, to terminate his appointment as CEO. The company said his termination was part of a “retrenchment exercise” which the company had started on 7 July 2021. It said that Dato’ Loh was actually contractually entitled to a termination payment of S$2,040,750 but the board had decided to pay him the reduced sum instead. In its announcement of the termination and payment on 22 December, the company did not provide further details about the “retrenchment exercise”.
My post raised several questions. First, why was Dato’ Loh given a termination payment, which the company said he was contractually entitled to, when the company’s latest annual report for FY2020 said that there are no termination, retirement or post-employment benefits provided for in the employment contracts with the directors, CEO or top five key management personnel.
Second, is the company correct in claiming that this payment does not require shareholder approval under section 168(1A) of the Companies Act, since the amount of nearly S$1.4 million is more than the total remuneration of just under S$1.3 million which the company disclosed was paid to Dato’ Loh for FY2020? Section 168(1A) says that shareholder approval is required if a termination payment exceeds the total emoluments of the director for the year immediately preceding his termination of employment.
In my comments for the Business Times report on 24 December 2021 (“Asti’s move to retrench CEO with S$1.4m entitlement questioned”), I also asked whether Dato’ Loh is continuing as executive chairman after he is terminated as CEO. The company has merely said he will continue as chairman. Would he be entitled to another termination payment for his executive chairman’s role if he is terminated?
I also said that I do not believe that the termination payment is fair and reasonable. The Code of Corporate Governance states that service contracts should contain fair and reasonable termination clauses which are not overly generous. In my experience, notice periods for such senior positions tend to be three to six months, and executives who are let go may be paid the salaries for such periods in lieu of notice. In a “commentary” in the 2005 Code of Corporate Governance, it was stated: “Notice periods in service contracts should be set at a period of six months or less. If it is necessary to offer longer notice periods to new directors recruited from outside, such periods should reduce to six months or less after the initial notice period.”
Commentaries in the 2005 Code were not subject to “comply or explain” but were nevertheless intended to convey good practices. At that time, there were concerns about excessively long notice periods, an issue I recall was initially flagged in the UK. Subsequent codes do not provide specific guidance on appropriate notice periods. Longer notice periods or more generous termination clauses may be justifiable in certain situations, and the context is relevant.
Let’s consider the context at ASTI in evaluating the reasonableness of the termination payment and the actions of the board.
On 19 December 2019, I wrote an article (“’Tis the season to be wary for minority shareholders at three companies”, Business Times) where I flagged numerous issues at ASTI, and two other SGX-listed companies, Advanced Systems Automation (ASA) and Dragon Group International (DGI), where Dato’ Loh was also executive chairman and CEO. The article mentioned that all three companies were in deep financial trouble, with all having racked up five successive years of losses from continuing operations from FY2014 to FY2018. ASTI and DGI were on the watchlist, and DGI was to be delisted. ASA was not on the watchlist because it is Catalist-listed but was trading at the lowest trading price possible of 0.1 Singapore cent and had net asset per share of just 0.01 Singapore cent.
ASTI’s financial performance improved dramatically in FY2019, with a loss from continuing operations of S$22.9 million in FY2018 turning into a profit from continuing operations of S$20.4 million in FY2019. However, the improvement was short-lived as it reported a loss from continuing operations of S$2.4 million in FY2020. DGI reported the same trend of a dramatic improvement from a loss to a large profit in FY2019 and then a reversal back to a loss in FY2020, while ASA continued to make losses in both FY2019 and FY2020.
The improvement in the profitability of ASTI in FY2019 was due to a gain on deemed disposal of subsidiaries of S$28.4 million included under other income. Note 7 to ASTI’s FY2019 financial statements states: “On 20 May 2019, DGI’s subsidiary EoCell Limited issued 999,999,930 shares representing 40% of enlarged share capital of EoCell Limited to Yinlong Energy Co., Ltd for a consideration of US$20,000,000 and 4999,999,895 shares representing 20% of the enlarged share capital to a company representing the key management of EoCell Limited. As a result, DGI’s shareholding in EoCell Limited was diluted to 40% from 100% and DGI has lost control over EoCell Limited. As DGI has significant influence over EoCell as an associate, the results of EoCell Limited are equity accounted from the date of loss of control.”. Similarly, DGI’s improvement in profitability was due to the same transaction, and it recorded a gain on deemed disposal of EoCell amounting to US$20.96 million. In other words, the profits in FY2019 at ASTI and DGI were boosted by the sale of shares in a subsidiary (including 20% to a company owned by key management of the subsidiary) and it was then deconsolidated.
The remuneration reports of the three companies show that Dato’ Loh was paid S$1.91 million and S$1.29 million respectively in FY2019 and FY2020 at ASTI; S$745,000 and S$188,270 in FY2019 and FY2020 respectively at DGI (he resigned as executive chairman and CEO just over three months after the start of FY2020); and S$810,000 and S$287,000 in FY2019 and FY2020 (where he also resigned at the same time as at DGI).
From FY2014 to FY2018, Dato’ Loh was paid an estimated S$23 million in remuneration by the three companies, with ASTI paying him about S$14.6 million – including a S$8 million “bonus and management incentive” paid by ASTI to him for FY2018 which was later suddenly revised to S$2.182 million.
The amount of S$2.182 million was then announced as an interested person transaction (IPT), as it was about 3.5 percent of the latest audited net tangible assets, above the 3 percent announcement threshold for IPTs under the SGX Rulebook.
Under SGX IPT rules, “directors’ fees and remuneration, and employment remuneration” are not considered IPTs, although “golden parachute” payments are not covered by the exception. It would appear that the “bonus and management incentive” paid to Dato’ Loh was not covered by the exemption under IPT rules, and hence, ASTI announced it as an IPT. It is unclear whether SGX had told ASTI that it was an IPT.
If the revised amount of S$2.182 million was deemed as an IPT, then the original amount of S$8 million should likewise have been deemed so. In this case, it would have crossed the 5 percent threshold requiring the approval of independent shareholders.
The company said that on 31 March 2019, the remuneration committee (RC) had deliberated the S$8 million bonus that was already approved and paid to Dato’ Loh, after he had communicated his decision to resign. It did not explain why a bonus for FY2018 would be revised when Dato’ Loh’s decision to resign was made in 2019 and was to be effective as late as 7 April 2020.
Did the company revise the bonus when it realised that it would have required the approval of independent shareholders as an IPT? It is difficult to understand why a bonus for FY2018 already approved and paid would be revised after Dato’ Loh told the board in March 2019 that he was going to resign, effective April 2020. Similarly, did it set the current termination payment to Dato’ Loh at an amount that would not require shareholder approval?
Even the revised bonus paid for FY2018 was contentious because it was to recognise “his contributions to the group since he assumed the role of the company’s CEO and executive chairman in 2003”. ASTI was already on the watchlist and had accumulated losses of S$50.2 million by that time. To think that the board had initially paid him S$8 million.
It turns out that Dato’ Loh did not resign with effect from 7 April 2020 after all. On 29 March 2020, ASTI announced that after a nearly one-year search for a replacement, it “has not been able to find a suitable replacement with the right credentials and varied skill sets to meet the challenges of the Company’s diverse technological businesses and organisational complexity”. SGX did not query what search the company did, even though it had announced his resignation and then withdrew it a year later.
Therefore, Dato’ Loh stayed on as executive chairman and CEO and now the company has decided to give him a termination payment of S$1.38 million, even though the company’s annual report said no such payments are contractually provided for.
Minority shareholders of ASTI do not have much to cheer about for Christmas. Come to think of it, neither do minority shareholders in many other SGX-listed companies.
