By Mak Yuen Teen

After posting my article “Shaky Governance at ZICO Holdings” yesterday (22 March) at 5.25 pm, regarding the interested person transactions (IPTs) and ratification of these IPTs involving an independent director (ID) of ZICO Holdings,  I was shocked, but not totally surprised, by the proposed ratification of IPTs announced by KTL Global at 11.31 pm last night.

In this case, the IPTs involve the provision of legal services by Chevalier Law LLC (Legal IPTs). The aggregate amount of all Legal IPTs entered from 1 January 2021 until the date of the announcement amounted to S$255,000, representing 64.72% of the Group’s latest audited NTA. This includes an amount of S$149,500 of Legal IPTs previously announced by the company on 14 February 2022.

Mr Chong Eng Wee, the managing director and 30% shareholder of Chevalier Law, was until 21 March 2022 (based on the announcement of his resignation at 11.33 pm last night), an ID of KTL Global. He was also the Chairman of the Remuneration Committee and the Performance Share Scheme Committee, and a member of the Audit Committee and Nominating Committee.

The announcement about the proposed ratification of the Legal IPTs provided details of the legal services provided and to be provided by Chevalier Law. It also said: “The Company had, in accordance with its internal policy, invited other law firms to provide quotes for the provision of the legal services…Chevalier Law had, in all instances, provided a fair and reasonable scope of work and fee quotes for the aforesaid transactions”.

The legal services read like a laundry list and relate to “various litigation, transactions and/or corporate actions involving and/or undertaken by the Group during such period including but not limited to legal services rendered in assisting with and advising on fund raising exercises such as the entry into the convertible loan agreement and the placement of shares by the Company, litigation work such as defending claims initiated by Khua Kian Keong against the Company, and advising the Company on responding to the originating summons taken out against the Company, Bluegas Private Limited and the former chief executive officer of the Company by Lawrence Group Inc., mergers and acquisitions such as the proposed acquisitions (via the Company’s subsidiary) of shares in Ebuy Pte. Ltd. and the property at 32 Quality Road, general corporate advisory work and various proposed corporate actions which have yet to be announced by the Company.”

Since Mr Chong is the managing director of Chevalier Law and a director of KTL Global, Chevalier Law may have an advantage in terms of understanding what legal services KTL was seeking, and proposing the scope and work and fees that is most acceptable to the company.  While the award of work is not only dependent on the amount of fees quoted, the company merely said Chevalier Law provided “a fair and reasonable scope of work and fee quotes”.

The company said Mr Chong “has also abstained from or participated in any deliberations and/or making any decisions relating to the selection and appointment of legal counsels for the Company during FY2021”. However, it did not say that Mr Chong was not personally involved in the legal services that were provided to the company. In fact, it said this: “…Mr Chong has been an independent director of the Company since 1 August 2019. The Company’s new management has been in charge of the Company since May 2021 and Mr. Chong provides a sense of continuity to the Company and offers guidance and legal advice when necessary” (emphasis is mine).

If Mr Chong was personally involved in providing the legal advice while at the same time acting as a director of the company, how does he separate his role as a legal adviser and a director of the company and ensure that he is able to address potential conflict of interest?  Further, while the amount of legal services provided for the 12-month period ended 31 December 2021 of S$149,500 was below the S$200,000 under the Code of Corporate Governance, there would be considerable doubt about the independence of Mr Chong. The company has changed its financial year from 31 December to 30 June so has not  yet published an annual report for the year ending 31 December 2021.

In its announcement last night, the company said: “The inadvertent oversight in not seeking prior shareholders’ approval for the Legal IPTs was discovered subsequent to the preparation of the 4Q Results Announcement. Upon discovery of the inadvertent oversight, the Group has not entered into further transactions with Chevalier Law, and is now taking the requisite steps to convene an extraordinary general meeting (“the EGM”) to seek shareholders’ ratification for the Legal IPTs”.

It added” “As the Listing Manual requires IPTs to be aggregated with other transactions entered into with the same interested person (excluding any transaction below S$100,000) during the same financial year, for purposes of calculating the materiality thresholds of the Legal IPTs in relation to Rules 905 and 906, the value of each transaction have been aggregated notwithstanding that the value of each of the Legal IPTs was less than S$100,000.”

As I mentioned in my article yesterday on ZICO Holdings, it is disappointing that SGX Regco chose not to remove the de minimis threshold for IPTs after providing such a compelling case for its removal in its consultation paper. Further, it does not require issuers to aggregate IPTs themselves and continue to exempt IPTs below S$100,000 from aggregation. It is difficult to see how SGX Regco will be able to monitor and exercise its powers of aggregation in any systematic way. Unless SGX Regco fixes this loophole, I expect to see more issuers seeking ratification for material IPTs long after they have occurred.