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Perhaps it's time to consider alternative adjudication mechanisms that serve to enhance confidence of all stakeholders
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Perhaps it's time to consider alternative adjudication mechanisms that serve to enhance confidence of all stakeholders
By PHILIP FONG
27 January 2012
The application for a court order by the Singapore Exchange (SGX) against China Sky Chemical Fibre (CSCF) captured widespread attention as this would have been the first-ever confrontation between SGX and a listed company.
SGX had on Nov 16, 2011, directed CSCF to appoint a special auditor to investigate matters including interested person transactions and a failed land acquisition in China. CSCF did not comply. This stand-off persisted even after SGX's public reprimand.
On the one hand, SGX considered that 'the interest of CSCF's shareholders and the investing public would be best served with the appointment of a Special Auditor'; on the other hand, CSCF retorted that a special audit would be too expensive and disruptive and would not be in its shareholders' interests. The impasse was not resolved despite a number of closed-door meetings between SGX and CSCF.
Letters between the two were subsequently disclosed publicly. SGX maintained that 'The Directive is made in the interest of the shareholders, and is taken only after careful and deliberate consideration'. The independent directors of CSCF resigned in the midst of this impasse.
The war of words persisted and ultimately culminated in SGX's application in court. In a surprising turn of events, on Jan 16, 2012, SGX withdrew its originating summons against CSCF 'in its entirety'. CSCF then announced separately that its respective lawyers have met and 'the Company will continue to communicate with SGX to resolve the impasse expediently'.
One immediate question that may be asked by a minority shareholder is 'what now?' The position seems to have reverted to that before the court application when parties were talking. What if the stand-off continues? Should the suspension remain?
The purpose of this commentary is not to answer these questions but to discuss the framework in which SGX exercises its power to direct the appointment of a special auditor and the premises in which this power had been exercised. It also observes how other foreign exchanges have dealt with similar cases.
Suffice it to say that with the withdrawal of the court application, an opportunity may have been missed for our courts to weigh in on possible questions over SGX's powers, and its exercise of those powers.
The powers of SGX over listed companies and the obligations of these companies are set out in the Listing Manual. In particular, Rule 704(14) of the Manual empowers SGX to direct a company to appoint a special auditor to investigate into the affairs of the company.
It is apposite to recount a few recent cases where SGX had directed a company to appoint a special auditor to investigate its affairs under Rule 704(14). It was reported recently that SGX had exercised this power more than 20 times since 2004.
In January 2009, SGX directed NEL to appoint a special auditor after the statutory auditors resigned following a confidential report filed to the Minister of Finance under the Companies Act where the auditors had 'reason to believe that a serious offence involving fraud or dishonesty is being or has been committed against the company'. The special audit report revealed certain fund movements 'match(ed) one cycle of round-tripping transactions'.
In May 2010, Darco Water Technologies Limited announced that it was directed by SGX to commence a special audit into the accounting records of its Taiwanese wholly owned subsidiary. Darco had already commenced its own 'independent investigative checks'. The report subsequently revealed misappropriation of funds of S$5.2 million.
In April 2010, China Milk was directed to appoint a special auditor in consideration of the 'possible implications for the company's ability to continue as a going concern' after the company had announced on Feb 12, 2010, that it was in default of its convertible bonds of US$170.56 million.
The appointment was necessary given the company's failure to provide 'timely and satisfactory responses to requests for information and the continued uncertainty surrounding its state of affairs'. The report revealed breaches of the Listing Rules on major transactions and disclosure requirements.
In the above and other past cases, the companies concerned did not resist SGX's directive under Rule 704(14). In fact, almost without exception, SGX's directive followed disclosures of irregularities and breaches of the Listing Rules or fraud.
On a historical basis, therefore, it would seem that SGX's directives under Rule 704(14), whether or not accompanied by explicit reasons, have been amply justified, if not vindicated, by subsequent events. In this light, CSCF's claim that the directive was 'wholly unjustifiable and without any merit' appears at odds with this track record.
In a listing process, the company enters into a contractual relationship with SGX when it provides an undertaking to comply with the Listing Rules, including Rule 704(14). Section 25 of the Securities & Futures Act (Section 25) statutorily empowers SGX to apply to court for an order to compel any Listco to comply with the Listing Rules where it fails to do so.
The CSCF case is the first attempt by SGX to exercise this statutory power. However, the withdrawal of the application means that a local judicial interpretation on Section 25 regarding SGX's power under Rule 704(14), and its discretion to exercise this power (with or without giving full reasons), would not be materialising soon. How might a court have dealt with such an application?
Court's interference
In Australia, the court indicated in the case of a company called Re Delta Gold Limited that in deciding whether or not to grant the court order, it would consider, as a factor, the views of the stock exchange as to the construction of the rule, but acknowledged that the interpretation was not binding on the court. At first glance, this approach is 'pro-regulator', but the reason for this appears to be that as ASX has the primary responsibility for ensuring compliance, the court should give some deference to the exchange's view, especially in a self-regulatory environment. The court would or should only interfere where there are clear breaches of procedure or abuse of process. It will be interesting to see whether our courts will adopt a similar approach.
How can or should a listed company respond to an application under Section 25? Under the Listing Rules, the 'decisions and requirements of the Exchange are conclusive and binding on the issuer'. Nevertheless, is judicial review of a decision by SGX in Singapore possible at least in concept? Going by the experience in some other countries, the answer appears to be a divided one.
In Hong Kong, judicial review has been expressly recognised as an available mechanism. Conversely, the position in Australia and Malaysia remains unsettled. Much of the debate has centred on balancing the nature of the relationship between the stock exchange and the listed companies vis-a-vis the larger regulatory role that the stock exchange plays in the market.
It may be observed that the channels to resolve impasses such as the one between SGX and CSCF are rather limited. A court process will be costly in terms of time and money, and may be hindered by legal conundrums. At the same time, to subjugate such impasses to the court system as the next available step appears to go against the ethos of a self-regulatory regime. Is there no other way? Perhaps it is a convenient time to consider an alternative adjudication or resolution process of the regulatory regime of the Stock Exchange of Hong Kong (HKEX). Five pertinent features are noteworthy:
The directors of companies seeking a listing have to give a personal undertaking to comply and to procure the company's compliance with the Listing Rules. Directors in Hong Kong therefore cannot seek to avoid their legal obligations by simply resigning from the company.
While the HKEX does not appear to have an explicit power to direct a listed company to appoint a special auditor, they have an in-house internal investigative team to investigate any suspected breaches. This would appear to deal with the ubiquitous issue of costs.
HKEX's Listing Committee is multi-partite with a majority of its 28 members from the private sector. The committee sits like a tribunal and makes a ruling after taking into account representations (written and oral) by any party or its legal representative. Its decisions are all publicly disclosed. Having such a well-represented committee to review the internal findings would appear to address concerns of bias.
At any stage of the proceedings before the Listing Committee, any party may put forward a settlement proposal in relation to any breaches. Once a settlement is reached, the Listing Committee may impose any sanctions and conditions which are accepted by the parties.
Where a party disagrees with a decision made by the Listing Committee, it can appeal before the Listing Appeals Committee.
The Hong Kong system appears to epitomise the ethos of self-regulation. It has potential advantages of saving time and cost and affords less ground for market participants to complain of bias or the exchange being 'a judge in its own cause'. It has been observed that the dispute resolution mechanism fosters greater transparency in the self-regulation process, complemented by a partnership between the public and private sectors.
The closing chapter to the CSCF-SGX saga has yet to be written. Nevertheless, this stand-off has given rise to questions over the extent to which the Singapore stock market can or should regulate itself. Perhaps it is time to consider implementing alternative adjudication mechanisms that serve to enhance the confidence of all stakeholders, including listed companies and private investors, in Singapore's capital markets.
The writer is the managing partner of Harry Elias Partnership LLP. He can be contacted at philfong@harryelias.com.sg