By Mak Yuen Teen

On 29 December 2021, ZICO Holdings Inc. (ZICO) held a virtual EGM for shareholders to approve two resolutions. One of these resolutions was the “Proposed Ratification and Approval of the Provision of Past ShakeUp Advances”. A total of 97,033,529 shares (or 29.67% of the total outstanding shares) voted on this resolution and it was passed by 100% of the votes cast.

Mr Chew Liong Kim, an independent director of the company (who was re-designated to non-independent on 1 January 2022) and held 2,171,421 shares, was the only shareholder who abstained from voting on this resolution. The reason he abstained was that ShakeUp Online Sdn. Bhd. (ShakeUp) to which the advances were made is 80% owned by him, with the other 20% owned indirectly by ZICO. The advances were said to be made from FY2017 to FY2021, and together with interest payable, amounted to a total of RM7,660,347.

The EGM circular provided the background to the ShakeUp advances. ShakeUp was incorporated on 14 February 2017 with an issued and paid-up capital of RM1.00 comprising of 1 ordinary share. Its business was to “spearhead the group’s strategy to venture into affordable online legal services”. ShakeUp subsequently increased its issued and paid-up capital to RM100 through the issue and allotment of 99 new ordinary shares. On 27 December 2017, Mr Chew acquired an 80% equity interest in ShakeUp for RM80, with the remaining 20% held by ZICO’s wholly-owned Malaysian subsidiary. Therefore, ShakeUp is an indirect associate company of ZICO and Mr Chew is its majority shareholder.

Assessment of independence

The circular said that at the time of the disposal of the 80% interest to Mr Chew, the Nominating Committee (NC) had reviewed Mr Chew’s independence and was of the view that his independence “was not affected consequent to the Disposal and he remained independent pursuant to Rule 704(7) of the Catalist Rules and the Code of Corporate Governance 2012 on the basis that ShakeUp became an associated company (as compared to a subsidiary) pursuant to the Disposal and therefore was no longer a related corporation of the Company as defined under the Act.” It also said Mr Chew “had declared his interests and abstained from all Board decisions on matters in connection with and transactions of the Company with ShakeUp.” The Board was of the view that Mr Chew’s “independence as an independent director as defined in the Code of Corporate Governance 2012 was not affected and that he was able to remain independent in character and judgement for all other matters”.

It also said that the Audit and Risk Committee (ARC) had reviewed the disposal as an interested person transaction (IPT) “and was satisfied that the terms of the Disposal were fair and reasonable, that it would be carried out on arms’ length basis on normal commercial terms, and that it was not prejudicial to the interests of the Company and its minority shareholders”. The ARC approved the disposal.

An independent director with managerial role?

The decision to dispose 80% of the interest in ShakeUp to Mr Chew was accompanied by an agreement between the company and Mr Chew for the latter “to oversee the development and implementation of ShakeUp’s strategy for 2 years”. This “involved his spending of time to oversee and monitor the procurements for the starting-up of the business that would involve capital and operational expenditure, collaboration and partnership with other service providers, the recruitment of a team to execute the business plan, and all related matters”. Mr Chew “agreed to provide these services at no cost in exchange for the Company’s support in terms of contributing to ShakeUp’s capital and operational expenses.” The company said it “was confident of this arrangement as Mr Chew Liong Kim has extensive experience in the information technology sector and strategic advisory services.”

When Mr Chew went for his re-election in April 2019, his involvement in ShakeUp was excluded from the information provided by the company for directors seeking re-election (pursuant to Appendix 7F of the Catalist Rules). Included in the information though was the boilerplate statement that “There are no relationships or circumstances which are likely to affect, or could appear to affect, his judgments”. At this point, ShakeUp’s net liabilities position had increased to RM4.27 million as at 31 December 2018, from RM1.06 million a year ago.

In 2018, ShakeUp “faced a number of unexpected challenges prior to the roll out of the Services”. It was informed by the Malaysian Bar Council that the Council took the view that the services offered “could amount to a possible breach of the Legal Profession Act 1976”. ShakeUp then had to change its plans although the company said it believes that it is possible to create a turnaround for ShakeUp with the resources provided by the ShakeUp advances.

Making advances but no relationship

Under the 2012 Code, a director who in the current or immediate past financial year is or was a “10% shareholder of…or an executive officer of, or a director of, any organisation  to which the company or any of its subsidiaries made, or from which the company or any of its subsidiaries received, significant payments or material services…in the current or immediate past financial year” would prima facie not be deemed to be independent. As a guide, payments aggregated over any financial year in excess of S$200,000 should generally be deemed significant.

According to the company, it made a total of RM7,660,347 of advances (including outstanding interest payments of RM953,979) to ShakeUp from FY2017 to FY2021 (it has yet to publish its FY2021 annual report). In fact, in FY2018 and FY2019, advances to ShakeUp amounted to RM3.14 million and RM1.66 million respectively. The amounts easily exceeded the S$200,000 guideline stipulated in the 2012 Code. The 2018 Code of Corporate Governance came into effect on 1 January 2019 and set similar thresholds.

In a nutshell, ZICO sold an 80% interest in ShakeUp for RM80 to Mr Chew, entered into an agreement for him to effectively manage what was now its associate, and made substantial advances to it. Yet the NC and Board still considered him to be technically independent based on the Code of Corporate Governance 2012 and from 2019 onwards, the Code of Corporate Governance 2018.

Did the NC and Board believe that as they were “advances”, they were not technically “payments” as mentioned in the Code and therefore the guideline/provision was not applicable?

Under Guideline 2.3 of the 2012 Code, it is clearly stated that “the relationships set out above are not intended to be exhaustive” and under guideline 4.3, the NC is supposed to consider “any other salient factors”.  Did the NC and Board consider these aspects of the guidelines in the Code? Similar questions apply under the 2018 Code as well.

In fact, given that ShakeUp was making continuing losses, did the ARC (of which Mr Chew was a member) deliberate on the need to impair the advances to ShakeUp?

In the Corporate Governance Report in ZICO’s annual reports from FY2017 to FY2020, it stated: “There are no relationships or circumstances which are likely to affect, or could appear to affect, the Independent Directors’ judgments” and “There are no Directors who are deemed independent by the Board, notwithstanding the existence of a relationship as stated in the Code that would otherwise deem him not to be independent”.

I strongly disagree with ZICO’s highly technical approach to disclosure and assessment of independence. Further, I do not believe that Mr Chew should have been deemed independent even under a highly technical approach to interpreting the Code.

Finally, on 31 December 2021, ZICO announced that it was re-designating Mr Chew from independent to non-independent with effect from 1 January 2022. It explained: “In view of the StartUp Advances provided by the Company during the Relevant Period which constituted IPTs, the Nominating Committee of the Company has, in consultation with the Company’s Sponsor, proposed for Mr Chew Liong Kim to be re-designated as a Non-Independent, Non-Executive Director”.

Musical chairs with sponsors

ZICO changed its sponsor from Asian Corporate Advisors (ACA) to Stamford Corporate Services (SCS) on 15 October 2021 “due to commercial reasons”. In my report with Chew Yi Hong titled “Who’s Sponsoring Who? Challenges of the Catalist Board” published in August 2020, we pointed out that ZICO was the only Catalist issuer we found to have terminated its full sponsor – PrimePartners Corporate Finance (PPCF) – as continuing sponsor before the minimum three-year period to retain the full sponsor was up. It replaced PPCF with SCS in September 2016 after about 22 months. It said that this was because ZICO and PPCF are both full sponsors and will engage in activities that are in direct competition. However, 18 months later in March 2018, it changed sponsor again, this time to ACA, which it said was for “commercial reasons”, including a preference of having a continuing sponsor with corporate finance background. Having switched from SCS to ACA, it has now switched back – perhaps it no longer needed a “continuing sponsor with corporate finance background”. If it was SCS that has now contributed to the re-designation of Mr Chew, it would appear to be a change for the better.

But for ZICO, it was unfortunately a re-designation that came far too late in my view.

Skidding off the fast track

Rather ironically, ZICO was designated by SGX as a Fast Track company, when the Fast Track programme was launched in April 2018. SGX Regco said that the programme “aims to affirm listed issuers that have been publicly recognised for high corporate governance standards and have maintained a good compliance track record.” SGX Fast Track issuers “can expect prioritised clearance for their corporate action submissions to SGX RegCo”.  It said: “An issuer’s eligibility for the programme will be continuously monitored and SGX RegCo has the discretion to exclude an issuer from the scheme at any time”.

It would appear that ZICO skidded off the track as it is no longer currently listed among the 95 Fast Track issuers, although a 7 November 2021 snapshot of SGX’s list shows that Zico was still on it then.

Aggregation of IPTs

The ZICO case also raises issues about the aggregation of IPTs under SGX listing rules. In December 2017, SGX issued a consultation paper on “Enhancements to Continuous Disclosures”. One of the proposals was that Rules 905(3) and 906(2), which provide that IPTs below S$100,000 are exempted from computing the relevant materiality thresholds (the “de minimis threshold”), be removed from the listing rules. SGX said it was “concerned that the de minimis threshold may encourage issuers to structure their IPTs into multiple IPTs with individual values below $100,000 to avoid triggering any obligation to comply with Chapter 9 of the Listing Rules, thereby resulting in an abuse of the de minimis threshold”. It proposed that “all IPTs entered into by the issuer’s group with the same interested person within the same financial year should be aggregated. The aggregated IPTs will then be benchmarked against SGX’s materiality thresholds of 3% and 5% in determining whether IPTs would trigger announcement or shareholders’ approval requirements”.

SGX added that companies are already required to track all their related party transactions (RPTs) under Singapore Financial Reporting Standards, and while the IPT and RPT rules may differ slightly, it felt the removal of the de minimis threshold should not cause additional hardship for issuers given that issuers would already have the necessary framework in place for tracking of their RPTs.

I responded to the consultation and supported this particular proposal. I wrote: “I agree with including IPTs below $100k. While some market players believe that this is too onerous, the risk of splitting of IPTs is real. Further, IPTs may pose risk not only because of the amount, but the nature of the IPT (e.g., IPTs related to independent directors). There is also a need to track individual IPTs to know if the aggregate exceeds the threshold”. I have observed such splitting of IPTs.

Unfortunately, in January 2020, SGX Regco announced that it would not proceed with this proposal “having considered industry feedback”. Instead, the listing rules were revised to expressly provide that SGX has the power to aggregate separate IPTs entered into during the same financial year and treat them as it they were one transaction.

This now brings us back to the IPTs relating to ShakeUp and Mr Chew.

ZICO disclosed the transfer of the 80% interest in ShakeUp to Mr Chew, and the consideration of RM80, in the IPT section of the company’s FY2017 annual report. There was no disclosure of any IPTs involving ShakeUp in its FY2018 annual report. It was only in the IPT section of the FY2019 and FY2020 annual reports that the company disclosed that advances were made to ShakeUp. This runs contrary to what ZICO said in the circular that it had previously disclosed in its annual reports for FY2018, FY2019 and FY2020 that it had made advances to ShakeUp for operational requirements. As mentioned earlier, ZICO has not yet published its FY2021 annual report.

In the IPT section of the FY2019 and FY2020 annual reports, it disclosed there there were no IPTs with value of more than S$100,000. It said that each transaction with ShakeUp was below S$100,000. It did not disclose the total amount of those advances in each of those years.

In its December 2021 EGM circular, it said: “For the avoidance of doubt, the aggregate value of the ShakeUp Advances for the respective FYs were not disclosed in the respective annual reports of the Company as it was of the view that Rule 907 of the Catalist Rules excludes, among others, transactions of less than S$100,000 for the purposes of disclosure of the aggregate value of all IPTs during the financial year under review”.

It added: “However, the Company took cognisance of the amendments to Rules 905 and 906 of the Catalist Rules in February 2020, pursuant to which Rule 905(5) and Rule 906(4) were added to empower the SGX-ST to aggregate IPTs below $100,000 entered into during the same financial year and treat them as they were one transaction in accordance with Rule 902 of the Catalist Rules”

It went further and said: “In light of the amendments to Rules 905 and 906 of the Catalist Rules in February 2020 and in the interests of good corporate governance and corporate transparency, the Board, in consultation with the Company’s Sponsor, proposed that the Company take the initiative to aggregate the value of the ShakeUp Advances provided during each financial year in the Relevant Period…and make the relevant disclosures and/or seek Shareholders’ ratification or approval in this Circular in respect of the past ShakeUp Advances that have exceeded the relevant materiality thresholds”.

I wonder if the aggregation would have been done and the ratification sought if there had not been a change of sponsor. It is far too late for the aggregation to be done so long after the advances have commenced.

Keeping the loophole open

By not going ahead with the proposed amendments, SGX Regco has left the door open for companies to split IPTs to avoid disclosure and/or shareholders’ approval. While SGX has the power to aggregate IPTs, it did not use it. It is unclear if SGX was even aware of the fact that there was a series of advances made to the same interested person that by now has accumulated to RM7,660,347.

It is disappointing that SGX Regco not only did not adopt the proposal that it had so compellingly made the case for in the consultation paper on account of “industry feedback”, but it failed to even require issuers to aggregate IPTs with the same interested person themselves, and disclose them in the IPT section of the annual report as soon as they exceed $100,000 within a financial year – and announce and/or seek shareholders’ approval if they exceed the materiality thresholds on an aggregate basis. How is SGX Regco going to exercise its power if it has no systematic means of monitoring the cumulation of IPTs with the same interested person?

In ZICO’s case, what makes it worse is that the IPTs which were conducted through a series of advances was with an ID, a particular risk I had flagged in my response to the consultation paper. In my view, ZICO should have disclosed the total amount of IPT transactions  with ShakeUp/Mr Chew even prior to the amendment of the rules in February 2020.

Need to ShakeUp ZICO?

ZICO‘s 90%-owned subsidiary, ZICO Capital Pte Ltd, provides sponsor services for Catalist, being authorised as a Full Sponsor since 8 August 2016. ZICO Capital is currently the continuing sponsor for 18 Catalist companies. Given how its parent has interpreted the corporate governance and listing rules, one may question the tone at the top it has set for Zico Capital as a sponsor, and whether the latter can be perceived to be an effective sponsor.