Summaries published in January 2024

Ensuring that directors understand and discharge their duties continues to be at the top of the Exchange’s enforcement priorities. As reflected in the summaries below, directors who turn a blind eye to the company’s situation may be subject to disciplinary action. Directors, whether executive or non-executive, are expected to be proactive. This includes understanding the company’s business, applying sufficient oversight, avoiding conflicts of interest, and ensuring that the company has appropriate and effective internal controls.

We have summarised below some cases in which private reprimands have been issued. These cases involved three executive directors (ED), one non-executive director (NED), five independent non-executive directors (INED) and one company. Although these reprimands are private in nature, they form part of the parties’ compliance records and will be taken into account by the Exchange if the parties commit further Listing Rule breaches.

We encourage everyone to read this summary as it contains important lessons about regulatory responsibilities and potential pitfalls.

Insufficient oversight

If we are investigating, for example, a transaction, we sometimes are told by directors that they had no knowledge of the transaction, perhaps because of the limited management role they played, the limited information they were given, or because they had delegated to others. This will invariably lead to questions on that director as to their proactivity and level of oversight.

In one case, within a week of listing, the company entered into agreements to pay out more than half of the IPO proceeds to third parties, but these payments were not disclosed in the listing prospectus. The payments were discovered a year later when the company published its annual results. The relevant directors (one NED and two INEDs) were not aware of the payments at the time they were made, but our investigation established that they had not received any monthly financial or business updates. They also had not asked for those updates. The directors were reprimanded for their failure to apply a reasonable degree of care, skill or diligence and to use their best endeavours to monitor the company’s financial position.

In another case, we investigated a series of significant transactions under which funds were transferred from the listed issuer group to a company controlled by a director and his spouse. The board of the Company was not notified of the fund transfers. The relevant director (an ED) was reprimanded as he failed to take part in any of the group’s affairs apart from attending board meetings. He failed to take an active interest in, and to make independent enquiries about, the group’s business and operations. Simple reliance on information supplied to him by other directors and senior management of the Company was not sufficient to discharge his responsibility.

In a third case, the company entered into certain arrangements that circumvented the connected transactions rules. The relevant directors (two EDs) had delegated responsibility for those arrangements to another ED. They were reprimanded for their failure to ensure that the delegated duties were properly discharged. They did not proactively follow up with the delegatee, or provide clear directions as to when matters should be reported back for further board consideration and approval.

Key takeaway

Directors should always be provided with information regularly regarding the issuer’s business and financial position. If that information is not provided, directors must request it. A failure to follow up will itself likely be a breach of duty.

Delegation must be managed carefully and with appropriate oversight. Unquestioning reliance on others is unlikely to be sufficient to discharge directors’ duties, even if those relied upon are other directors or senior management.

Conflicts of interest

The duty to avoid conflicts of interest is a fundamental expectation of directors. See the Exchange’s Enforcement Bulletin (September 2023) for more cases and analysis on conflicts of interest.

In one case involving a placing, the listed issuer’s placing agent had appointed a sub-placing agent. The sub-placing agent received more than 90% of the placing fees. The sub-placing agent was controlled by two EDs. The two EDs were reprimanded for, among other things, their failure to avoid conflicts of interest.

In another case, a listed issuer entered into an undisclosed arrangement which conferred benefits on a connected person. The listed issuer was found to be in breach of the disclosure and approval requirements for connected transactions and was reprimanded.

Key takeaway

The threshold for conflicts of interest is very low; action may be required even if there is only a potential for conflict. Disclosure and transparency are key.

Duties in respect of internal controls

Directors and senior management must take steps to ensure that issuers have sound and effective internal control systems in place to support Listing Rules compliance.

In one case, the company’s subsidiary entered into an acquisition that should have been subject to shareholders’ approval under the Listing Rules. The relevant directors (three INEDs) had played no role in overseeing that aspect of the group’s business. They were reprimanded as a result of both their unquestioning reliance on others (see “Insufficient oversight” above), but also because there was no evidence of them taking any meaningful steps to ensure the adequacy and effectiveness of the internal controls in respect of the business that had been acquired. Further, they did not evaluate and review the effectiveness of the checks and balances system.

Key takeaway

Directors are expected to take proactive steps and exercise independent judgement in ensuring that there are appropriate and effective internal controls in place.