Best of both worlds – Interested Party transactions
On 13 May 2019, SGXReg Co has issued BEST World with a notice of compliance for a request of information relating to Changsha Best, a primary import agent of BEST World in China and its biggest customer. The issue was on the relationship of Changsha Best with Best World and whether the transactions between the two were conducted on normal commercial terms after revelations that Changsha Best is solely owned by Mr Koh Kim Chuan who is also the legal representative and the brother-in-law of its CEO Ms Hoan,
Best World has maintained that Changsha Best is an independent party on the basis neither Mr Koh nor his wife Mary Huan (sister of Ms Hoan) are involved in the management and operations of Changsha Best.
In accordance to the SGX Chapter 9, all transactions > $100,000 with interested party requires a minimum immediate announcement of the details of the transactions if transaction value = > 3% of the group’s latest audited net tangible assets and a further shareholders’ approval if the transaction value = > 5% of the group’s latest audited net tangible assets. Interested persons as defined under s904 as a director, chief executive officer, or controlling shareholder of the issuer or an associate of any such director, chief executive officer, or controlling shareholder. Prima facie, it seems that Best World appears to have treaded within the technical definition of interested party transaction for non-disclosure or is it not so ?
The SGX Chapter 9 has also stated the main intention of the requirements in its s901 and s902 that the objective of this Chapter is to guard against the risk that interested persons could influence the issuer, its subsidiaries or associated companies, to enter into transactions with interested persons that may adversely affect the interests of the issuer or its shareholders. In addition, it clearly stated the application of the interested party transaction must be considered in relation to the objective as well as the economic and commercialsubstanceof the interested person transaction, instead of legal form and technicality.The key question then for all interested party transactions is not just restricted to the narrow definition of director, CEO or controlling shareholder but whether the interested person in question would have an undue influence on the Company and if so is the transaction done at a terms other than normal.
Based on the fact that the transaction is a person related to the CEO, it is likely that it would falls into the interested person within the meaning of SGX rulebook s901. The next question is whether the economic and substance of the transaction indicates terms that would suggest that it is likely to be terms negotiated with a non-independent party. Both are questions of fact. As in any Act in the statute or regulations, it is created with an intention and objective with its definition at best illustrating the minimum but not the full requirements. It is also understandable that all regulations was never intended or designed to cater for all possible scenarios at the time of enactment but the spirit of what it intends to cover. SGX Regco is likely to reemphasise and recalibrate the definition of interested party transactions in the light of the above of enforcing the spirit and not just the letter of the rule.
So is the Board of listed Company enjoying the Best of both worlds ? Maybe for now but definitely not for long.