Note: This article was first posted on 15 January 2022 at 11.21 am. It was updated on 16 January 2022 at 7.35 am to add a paragraph at the end of the section “Convoluted response” which is highlighted in bold.

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On 14 January 2022, Econ Healthcare responded to SGX queries about its share trading debacle, together with a press statement. The response is confusing and contradictory and, in my view, does not in any way absolve the board and the need for a proper investigation.

Convoluted response

Its response to query 1, which is reproduced in full here, said:

“The Company wishes to clarify that none of the directors or controlling shareholders of the Company has or had any interest in the transactions disclosed in the Company’s announcements on 9 January 2022 and 12 January 2022, namely the acquisition and subsequent disposal by the Company of shares of Crosstec.

Between 24 November 2021 and 7 January 2022, Mr Ong Chu Poh, the Executive Chairman and Group CEO and a controlling shareholder of the Company, acquired an aggregate of 2,700,000 Crosstec shares, which he sold on 7 January 2022. He acquired a further 1,200,000 Crosstec shares on 7 January 2022, which he sold on 13 January 2022. As at the date of this announcement, Mr Ong has no shareholding in Crosstec. Based on publicly available information on the issued share capital of Crosstec, his holding of Crosstec shares amounted to less than 5% of the issued shares of Crosstec.

For the avoidance of doubt, notwithstanding Mr Ong Chu Poh’s less than 5% interest in the issued shares of Crosstec and apart from his shareholding interest in the Company, he did not have any interest in the acquisition and subsequent disposal of Crosstec shares by the Company.

Crosstec is a company listed on the Hong Kong Stock Exchange (the “HKEx”), and the respective acquisition and disposal of Crosstec shares by the Company and Mr Ong Chu Poh were done on-market. The Company did not acquire Crosstec shares from nor did the Company sell Crosstec shares to any of its directors or controlling shareholders, including Mr Ong Chu Poh.”

The Company made its first acquisition of Crosstec shares on 30 December 2021 and its second acquisition on 6 January 2022. Mr Ong Chu Poh, the executive chairman and controlling shareholder, acquired Crosstec shares from 24 November 2021 to 7 January 2022, and sold them all on 7 January 2022.

How can the Company say that Mr Ong did not have an interest when the Company acquired the Crosstec shares on 30 December 2021 and 6 January 2022 if Mr Ong was acquiring shares from 24 November 2021 to 7 January 2022 and held an aggregate of 2.7 million Crosstec shares which he sold on 7 January 2022? Is the Company saying that Mr Ong sold all his Crosstec shares before the Company acquired Crosstec shares on 30 December 2021 and 6 January 2022, and then bought them again, and therefore technically did not have an interest at the time of the acquisition of those shares?

I am totally confused by what the Company is saying and I am likely not the only one.

The Company disposed all of its Crosstec shares on 12 January 2022. After selling all his 2.7 million Crosstec shares on 7 January 2022, Mr Ong bought a further 1.2 million Crosstec shares that same day, which he sold on 13 January 2022.

How can the Company say that Mr Ong did not have any interest when it disposed of its Crosstec shares if it sold those shares on 12 January 2022 and Mr Ong sold them the next day?

And what is one to make of this statement: “For the avoidance of doubt, notwithstanding Mr Ong Chu Poh’s less than 5% interest in the issued shares of Crosstec and apart from his shareholding interest in the Company, he did not have any interest in the acquisition and subsequent disposal of Crosstec shares by the Company.”

It would appear that the Company is saying that Mr Ong did not have an interest in the acquisition and disposal of the Crosstec shares by the Company because it did not buy or sell those shares from/to Mr Ong. Mr Ong owned shares in Crosstec and the company’s dealing in those same shares will affect the price of those shares. In my view, Mr Ong clearly has an interest in those transactions even though the Company did not transact directly with Mr Ong. If this is how the Board considers conflict of interest issues, then it is worrying and it makes one wonder how it addresses conflict of interest issues in other situations. I believe the continuing sponsor should be asked to explain what review it did for the announcements and what advice it gave to the Company.

More information about actions needed

In its Press Statement of 14 January 2022, the Company said: “Executive Chairman and Group Chief Executive Officer, Mr Ong Chu Poh had made the investment in good faith with the expectation to improve the yield of the Group’s idle cash”.

Mr Ong started personally buying Crosstec shares on 24 November 2021, when the closing price was HK$0.89, and continuing buying Crosstec shares until 7 January 2022 when its closing price was HK$2.34.

He purchased shares on behalf of the Company on 30 December 2021 when the closing price was HK$1.67 and on 6 January 2022 when the closing price was at its absolute peak of HK$2.38.

While he was buying shares on behalf of the Company on 6 January 2022, he sold all his personal shares on 7 January 2022. Granted, he personally bought 1.2 million Crosstec shares again on 7 January, but his net personal investment in Crosstec shares had declined by 1.5 million shares the day after he procured the Company to buy more Crosstec shares.

There is a need for Mr Ong to more clearly explain his actions.

Reasonable diligence?

In its response to query 3, the Company said that the Crosstec investment was recommended to Mr Ong “by an individual purporting to be Dr Chan Yan Chong, an established academic and stock commentator who was a past acquaintance of Mr Ong.” (emphasis mine)

In other words, it is unclear who is the individual who recommended the investment to Mr Ong. Regardless, one would not expect share investment decisions of a Company to be based on recommendations from an individual no matter what his credentials may be. The Company did try to justify that it did further homework before deciding to invest in Crosstec shares.

The Company said: “After being made aware of this potential investment and after the Company considered publicly available information on Crosstec, including information available on the website of HKEx such as its annual report and financial statements, a decision was made by Mr Ong to invest in Crosstec shares”.

Based on Crosstec’s latest annual report for the year ended 30 June 2021, it made a loss attributable to shareholders of HK$11.8 million in FY2021 and a loss of HK$28.2 million in FY2020. It has accumulated losses of HK$21.5 million as at 30 June 2021. Net cash used in operating activities was negative HK$9.3 million for FY2021 and negative HK$9.1 million in FY2020.

The company said that the rationale for the acquisitions “is to improve the yield on idle cash through dividends and share price appreciation.”. Based on Crosstec’s annual reports from FY2016 to FY2021 available on HKEx, it has never paid a dividend in all those years.

On 21 December 2021, Crosstec announced that its controlling shareholder, who is also the chairman and CEO,  had disposed 45,320,000 shares on the open market, out of his total stake of 250,300,000, and as a result he ceased being a controlling shareholder. It was also disclosed that following the disposal, he and his associates who are deemed interested in the same shares are no longer bound by the Deed of Non-competition which they had entered into in favour of the company and all undertakings under the Deed have lapsed. Under the Deed, these individuals had given irrevocable undertakings that they will not, and will procure their close associates not to, directly or indirectly “commence, engage in, participate in or acquire any business which competes or may compete directly or indirectly with the core busness of the Group…”

With all these negative indicators, what makes Crosstec so attractive that the Company would invest nearly S$4 million into just this one company? Did Mr Ong and the other directors exercise reasonable diligence in investing in Crosstec shares?

Delegating responsibly

In response to query 4, the Company said that its investment policy states that the board shall appoint an investment committee (IC), “which shall comprise at least three persons, comprising (1) the Group CEO who will be the Chairman of the IC and also be responsible for the execution of all approved investments, (2) the Group CFO and (3) other member(s) nominated by the Nominating Committee from time to time.”

It went on to say: “The Board will imminently be undertaking a review of the composition of the IC, including appointing a third member to the IC”.

The horse has not only bolted, it is lying badly injured. It is far too late for the Board to only now consider appointing a third member.

It would seem that the two members of the IC which made  the investment in Crosstec were just the Group CEO and Group CFO.

In fact, the Company said: “In November 2021, the Board authorised Mr Ong Chu Poh, the Executive Chairman and Group CEO and Chairman of the IC, to transact the investment in quoted securities at an amount of S$1.2 million and in December 2021, the Board approved a further mandate of S$4.2 million for the investment in quoted securities and gave authority to Mr Ong for the investment in quoted securities.”

From the disclosures by the Company (which are confusing to say the least), it would appear that the Board was aware that Mr Ong has an interest in Crosstec shares when the Company bought those shares, since the Company’s “disclosure of interest” statements were qualified to merely state that there was no interest of 5% or more.

If the Board was aware, how could it leave the decision to to make the investment into Crosstec issues with Mr Ong? Since Mr Ong has an interest in Crosstec shares, he should not be involved in the decision to invest at all.

While directors can delegate authority to committees and management, directors are responsible for the exercise of the power by the delegatee as if the power had been exercised by the directors themselves. This is the case unless the directors believe on reasonable grounds at all times that the delegatee would exercise the power in conformity with the duties imposed on the directors; and the directors believe on reasonable grounds, in good faith and after making proper inquiry where necessary, that the delegatee was reliable and competent in relation to the power delegated.

Can the directors be said to have delegated responsibly and discharged their duties?

There is a need for regulators to thoroughly investigate the actions of the directors in this debacle at Econ Healthcare. There is also a need to review the announcements to determine whether the continuing sponsor has discharged its responsibilities.