By Mak Yuen Teen

On 24 June 2021, SGX announced the expansion of the enforcement powers of SGX Regco. For breaches of listing rules committed on or after 1 August 2021, SGX Regco would have the power to take direct public enforcement actions, namely:

“1. requiring an issuer to comply with conditions on the activities undertaken by the issuer;
2. issuing public reprimands;
3. directing the resignation of the directors or executive officers from an existing position in any listed issuer;
4. issuing an order to prohibit any listed issuer from appointing or reappointing the Relevant Person as directors or executive officers; or
5. issuing an order for the denial of market facilities.”

It adds: “If SGX Regco determines that the breach warrants the imposition of more severe and pecuniary sanctions such as fines, SGX Regco will have to initiate disciplinary proceedings against the Relevant Persons before the Disciplinary Committee”.

Since the announcement of SGX Regco’s enhanced powers on 24 June 2021, there have been seven cases of public disciplinary actions relating to the company and/or certain directors and officers. Similar to most past public disciplinary actions, none of these seven cases resulted in any public disciplinary action against non-executive directors (NEDs), including independent directors (IDs).

All seven cases involved breaches of listing rules committed before 1 August 2021. Since the Listings Disciplinary Committee (LDC) was only established on 15 September 2015, enforcement actions for breaches of listing rules committed before that date are taken by SGX Regco. The two cases involving Trek 2000 and Debao Property Development Limited fell into that category. The other five cases involving Yamada Green Resources Limited, Aspen (Group) Holdings, AGV Group Limited, Tee International Limited and Astaka Holdings Limited relate to breaches committed after 15 September 2015 and before 1 August 2021, and enforcement actions were taken by the LDC.

Based on the seven cases, the announcement of the disciplinary actions when taken by SGX Regco includes relatively brief details of the disciplinary actions and the breaches of the listing rules. A separate more detailed “grounds of decision” is published when the disciplinary actions are imposed by the LDC.

Although the LDC’s grounds of decision provide more details of the charges, breaches and the circumstances surrounding the breaches, it is unclear how it decides on the actual sanctions that are imposed. Take the case involving Aspen (Group) Holdings for which public disciplinary actions taken by the LDC were announced on 26 August 2022.

SGX brought four charges against the company; four charges against the group CEO/president/executive director (ED); three charges against the two other EDs; and two charges against “other relevant directors” (i.e., the NEDs, including IDs). The company was found to have breached mainboard rules 703 and 719(1) by:

“(a) releasing an announcement on SGXNET, disclosing that one of the Group’s subsidiaries had entered into an Master Supply Agreement (“MSA”) with Honeywell International Inc (“Honeywell”), which was non-factual, false and misleading;

(b) failing to promptly disclose (i) the non-consummation of the MSA by Honeywell, and (ii) that negotiations with Honeywell on the MSA had been officially terminated, material information known to the Company which was necessary to avoid the establishment of a false market in the Company’s securities; and

(c) failing to have in place adequate and effective systems of internal controls and risk management systems.”

The purported MSA with Honeywell involved an amount of US$210 million (or about S$281.67 million based on the then exchange rate). The announcement was made before the start of trading on 13 April 2021. Based on Aspen’s closing price of S$0.265 the previous day and its total issued and outstanding shares of 1,083,270,000, its total market capitalisation was S$287.07 million just before the announcement. Therefore, the amount in the “non-factual, false and misleading” announcement was about same as the company’s market capitalisation.

The LDC issued public disciplinary actions on the company, the group CEO and the two other EDs. However, for the NEDs including IDs, it issued a private warning to each and directed that their identities be anonymised. The grounds for decision stated:

“57. As non-executive directors, while the Other Relevant Directors may place some reliance on [the group CEO] and the EDs to handle most of the Company’s day-to-day affairs, there is a limit to which such reliance is reasonable.

58. In this case, the Other Relevant Directors were put on notice that the Company was undergoing material developments that required close monitoring to ensure compliance with the Mainboard Rules, but failed to adequately discharge their duties as directors of the Company by failing to make reasonable enquiries with the management team and by failing to seek to be kept apprised of the situation with Honeywell.

59. The Other Relevant Directors were required to make their own independent assessment, and to make reasonable enquiries as and when necessary, if they were to fulfil their duties properly. Passively relying on information volunteered by the management team cannot be considered sufficient in and of itself in all circumstances.”

The LDC did not explain why the above failings by the NEDs only warrant a private warning. Under what such circumstances would the LDC impose public reprimands for NEDs? The LDC has effectively set a high bar for public reprimands for NEDs.

It is also unclear why the case was not referred by SGX to the authorities for investigation into possible breaches of the Securities and Futures Act, given that the company’s disclosure of the MSA was found to be “non-factual, false and misleading” and the amount involved was about the same as the company’s market capitalisation.

By way of comparison, let’s look at the three most recent cases of public enforcement action by Bursa Malaysia involving issuers.

On 1 September 2022, Bursa announced that it had publicly reprimanded Pasdec Holdings Berhad and seven of its directors for breaches of Bursa Malaysia’s Main Market Listing Requirements.

The first breach relates to failing to issue the annual report for the financial year ended 31 December 2019 within the extended timeframe of 31 July 2020 – the annual report was issued on 27 October 2020, after a delay of 59 market days. On SGX, it is not uncommon for issuers to apply for multiple extensions and I am not aware of any issuer being publicly sanctioned for being late with issuing its annual report. Bursa is far stricter in granting extensions to announce results, issue annual reports and hold AGMs, compared to SGX.

The second breach was for failing to ensure that the company’s fourth quarterly report for FY ended 31 December 2019, announced on 28 February 2020, took into account certain adjustments which had been the subject of a company’s announcement, resulting in a RM11.14 million or 68.1% variance between audited and unaudited results. On SGX, it is not uncommon to see material variances between audited and unaudited results, and I am not aware of any cases of SGX taking action against issuers for such material variances.

The third breach was for failing to comply with the enforceable undertaking provided by the company to Bursa which required the company to ensure that its board of directors “review and assess the adequacy and competency of the company’s finance and accounting resources and adequacy, comprehensiveness and effectiveness of the company’s policies and procedures, internal controls and/or risk management system and full and effective implementation of the same…” and that the company would not commit a breach of the relevant listing rule in respect of the company’s quarterly reports and/or annual reports for a period of 3 years.

The seven directors who were sanctioned were all publicly reprimanded for each of the three breaches. The two EDs were each also fined a total of RM79,500, while the independent board chairman, two IDs who were audit committee (AC) chairman and member, and two NEDs (including one who was AC member) were each fined a total of RM61,800.

Also on 1 September 2022, Bursa announced that it had publicly reprimanded Anzo Holdings Berhad and three directors for each of three breaches which occurred in 2020. The independent board chairman who was also an AC member, and another ID and AC member, were each also fined a total of RM75,000 for the three breaches, while the managing director was fined a total of RM150,000. The breaches relate to late announcement of a supply agreement which was a related party transaction (RPT); delay in compliance with RPT requirements; and failing to obtain prior shareholders’ approval for the diversification of the business.

In the third and most recent case which was announced on 30 September 2022, Bursa publicly reprimanded and fined six directors of Brem Holding Berhad. The managing director was fined RM200,000; and the two other EDs, one ID (who was the AC chairman) and two NEDs (one of whom was an AC member) were fined RM50,000 each. The independent board chairman who was also an AC member at the time of the material breach had passed away.The breaches relate to failure to ensure that payments/advances totalling RM26.5 million over a five-year period from August 2014 to August 2019 were fair and reasonable to the company, and not to the detriment of the company and its shareholders.

The three recent cases which I have mentioned above continue the trend of Bursa holding IDs and NEDs accountable in their enforcement actions. Meanwhile on SGX, IDs and NEDs can keep calm, collect fees and carry on.