Failure to manage and disclose RPTs = £4.6m fine for premium listed company

The Financial Conduct Authority has issued its final notice (Notice) to Asia Resource Minerals plc (the Company), in which it imposed a fine of £4.65m for breaches of the Listing Rules (LRs) and Disclosure and Transparency Rules (DTRs).

Prior to coming to market in June 2011 (as Bumi plc), the Company acquired holdings in Indonesian coal mining operations, including an 85% interest in a Indonesian company engaged in mining activities (the Subsidiary), which itself was listed on the Indonesian Stock Exchange. The breaches of the LRs and DTRs principally relate to a failure to appropriately manage and disclose related party transactions (RPTs) involving the Subsidiary.

The fine is another turn in an unfortunate tale which has seen a significant loss in value for investors – on its (premium) listing the Company had a market capitalisation of just under £2.5bn, which had dwindled to just under £37m by March 2015. Shares in the Company are currently suspended, amidst legal action against the director of its remaining Indonesian subsidiary and an offer for the Company.

Internal investigation into control processes and discovery of undisclosed RPTs

In September 2012, after just over a year on the market, the Company announced it had become aware of allegations concerning financial and other irregularities in its Indonesian operations. Shortly thereafter the Company commenced a review of its internal controls, including the effectiveness of its processes to identify and deal with potential RPTs. This was followed up by a separate review of all RPTs, so as to have a complete record of these for the purposes of its 2012 annual report. As a result of these reviews, in March 2013 the Company informed its advisers that it may have failed to comply with the LRs and DTRs with regard to historic RPTs. Depending on their size, RPTs require disclosure and/or prior shareholder approval under LR 11. None of the identified RPTs had been appropriately dealt with under LR 11.

After a period of consultation with the Company, its financial advisers notified the FCA in May 2013 that three post-listing transactions were in fact RPTs, the total value which amounted to $12.7m. The counterparties to these RPTs were companies within the Recapital group. The Recapital group was associated with Rosan Roeslani, a non-executive director of the Company and president director of the Subsidiary. The RPTs comprised:

• an unsecured loan of $7.1m on non-commercial terms to a member of the Recapital group;
• the hire of private jets by the Recapital group to senior management of the Subsidiary at a cost of $4.9m, the majority of the use of such jets being outside the ordinary course of business; and
• the $0.7m purchase by the Subsidiary of a vessel from the Recapital group outside the ordinary course of business.

In addition to these identified RPTs, there were other transactions totalling $225.3m in respect of which the Company was (and remains) unable to accurately identify the ultimate counterparty beneficiary in order to perform an accurate RPT analysis. In giving the Notice, the FCA made no finding regarding the nature of these other transactions, but noted that the failure to be able to accurately identify the nature of the transactions was further evidence of the failure of the Company’s internal controls.

“Pretty well designed and thought through, but there wasn’t much evidence of implementation” – the failure of the group’s internal controls

In addition to the breaches of LR 11, the FCA also considered that the Company had been in breach of Listing Principle 2 (now Listing Principle 1 following the 2014 introduction of the Premium Listing Principles), which requires the Company to take reasonable steps to establish and maintain adequate procedures, systems and controls to enable it to comply with its obligations.

The FCA found that, whilst the Company had established a policy to identify and deal with RPTs prior to its listing, that policy had not been properly implemented at either Company or Subsidiary level. Whilst there was some evidence of training for the directors and senior management of the Subsidiary in relation to the ongoing obligations of a listed company as part of the listing process, these training sessions were not attended by certain key members of the Subsidiary board. The FCA notes that this “non-attendance this was not followed up within a reasonable time and no record has been provided by the Company that the relevant individuals received this training“.  Nor was there any evidence that any training had been given the employees of the Subsidiary below senior management level in relation to the Company’s RPT policy.

Whilst steps were taken internally to improve the quality of the group’s internal controls, the Company acknowledged in its 2012 annual report that there had been a breakdown in management oversight of the Subsidiary and that Company policies had not been implemented. The implementation of the RPT policy was noted as a matter of particular concern at meetings of the Company’s executive committee held in 2012, but the FCA considered that “the expressed concern was not addressed sufficiently quickly and effectively“.

Quantifying the penalty

In addition to the breaches of Listing Principle 2 and LR 11, the FCA also found that the Company also breached LR 8.2.3 which required the Company to obtain the guidance of a sponsor when proposing to enter into a transaction which is, or may be, an RPT in order to assess the application of the LRs and DTRs, and DTR4.1.3 by failing to publish its 2012 annual report within 4 months of the end of the financial year.

In determining the penalty, the FCA used the value of the RPTs as the relevant indicator of the harm or potential harm caused by the breaches. The FCA found that the breaches were a Level 4 breach under the FCA’s Decision Procedure and Penalties Guide, equating to a fine equal to 75% of the value of the three identified RPTs. The FCA took into account a number of factors in determining the seriousness of the breach, including the fact that the breaches revealed “serious and systemic weaknesses in the procedures and internal controls relating to the Company’s business” and that the “behaviour constituting the breaches involved a significant departure from the standards expected of premium-listed companies“. The fine was reduced from £6.64m for early settlement under the FCA’s settlement procedures.

Osborne Clarke comment

This case highlights the need for robust implementation of internal policies to ensure compliance with what is now Listing Principle 1, as well as suitable engagement with the company’s sponsor in cases where it is not clear whether the RPT rules are engaged. The need for adequate executive and non-executive oversight, as well as effective (and ongoing) training on these policies becomes even more acute where overseas operations are involved, where problems can arise as a result of both the geographical separation between local management and the UK board, and local unfamiliarity with the governance requirements of the UK’s capital markets.

The importance of adequate and continuing training in relation to listed company and PDMR obligations generally was also highlighted by the FCA in its final notice issued to Reckitt Benckiser earlier this year (which we discuss in this post), where failure to comply with Listing Principle 1 contributed to late and incomplete disclosure to the market of dealings by two of its PDMRs.