The Financial Conduct Authority (FCA) has published a final notice imposing a fine of £4,651,200 on Asia Resource Minerals plc (ARM) for:
- failing to identify related party transactions (RPTs) valued at approximately £8 million,
- failing to have in place adequate systems and controls to comply with its obligations as a listed company, and
- breaching other rules applicable to listed companies.
Click here to read the final notice which sets out the factual background in detail and summarises the full findings of the FCA's investigation.
Otherwise, read on for our summary of the key breaches and what lessons should be learnt by listed companies.
ARM (formerly Bumi plc) is a UK incorporated company which was admitted to the premium listed segment of the Official List on 28 June 2011. ARM holds a majority shareholding in an Indonesian incorporated company, PT Berau Coal Energy Tbk (the Subsidiary) which is listed on the Indonesian Stock Exchange.
On 19 April 2013, ARM notified the UKLA that it would be unable to publish its 2012 annual financial report (2012 Report) by the required deadline set out in the Disclosure and Transparency Rules (DTRs), due to an ongoing internal investigation of the integrity of certain items on the balance sheet of the Subsidiary, including the review of historic potential RPTs. On 22 April 2013, at ARM's request, the FCA suspended ARM's shares from trading for three months to allow the company time to review and publish the 2012 Report. The company published its 2012 Report on 31 May 2013 and shares were restored to trading on 22 July 2013.
What were the key failings?
Following its internal review, ARM identified three RPTs by its Subsidiary which had occurred and consequently, ARM admitted breaches of the LRs relating to those RPTs. Additionally, as part of ARM's review of historic transactions, various transactions were retrospectively analysed and it was concluded that they were either not RPTs or that ARM was unable to identify the ultimate beneficiaries of the transactions.
Which rules were breached?
The FCA identified the following breaches of the LRs and DTRs (as were in force at the relevant time) by ARM:
Breach of Listing Principle 2 (now Listing Principle 1) – A listed company must take reasonable steps to establish and maintain adequate procedures, systems and controls to enable it to comply with its obligations
- ARM failed to take reasonable steps to manage the increased risk of the occurrence of RPTs. The FCA found that there were a number of red flags which should have alerted ARM of the possibility of RPTs, including the fact that:
- the Subsidiary was based in Indonesia and its directors were unfamiliar with the UK listing regime,
- there were also potentially connected parties among the founding shareholders, their Indonesian operations and subsidiaries and certain board directors of ARM and the Subsidiary had senior management or board positions in other companies in the same industry and other operations and financial interests in Indonesia, and
- there were past concerns regarding RPTs
- ARM failed to establish adequate management oversight and control over the Subsidiary. In particular, there was an overreliance on senior management of the Subsidiary to implement the RPT policy and there was insufficient monitoring by the company to ensure that the RPT was being implemented across the Subsidiary.
- Whilst there was a RPT policy in place, ARM failed to implement it at both company and Subsidiary level. Amongst other things, the FCA found that there was inadequate training regarding the RPT policy at company and Subsidiary level and that there were issues in monitoring the level, content and quality of information from the Subsidiary to the company which contributed to the three RPTs (and other transactions being identified as possible RPTs) not being identified at an earlier stage.
Breach of LR 8.2.3R – A premium listed company proposing to enter into a possible RPT must obtain the guidance of a sponsor in order to assess the application of the LRs and the DTRs
ARM failed to analyse whether certain transactions amounted to RPTs and should have obtained the guidance of a sponsor where it proposed to enter into any transaction which is, or may be, an RPT. The FCA noted that a listed company may itself be well placed to determine whether a transaction is an RPT (for example, where it is clearly in the ordinary course of business or falls within the small transaction exemption). However, where there is sufficient uncertainty, a Sponsor must be consulted.
Breach of LRs 11.1.10R and 11.1.11R – LRs relating to requirements for smaller RPTs and the aggregation of RPTs in any 12 month period
Having determined retrospectively that certain transactions were RPTs, ARM had failed to comply with the LRs relating to those RPTs at the relevant time.
Breach of DTR 4.1.3R – An issuer must ensure that its annual financial report is published within four months after the end of the relevant financial year
ARM delayed the publication of 2012 Report to conclude its review of past transactions. Consequently, it breached the requirement to publish its report within the stipulated time period.
What lessons should be learnt?
In its final notice, the FCA noted that ARM had taken various steps to address its failings which included making changes to the senior management and boards of the company, the Subsidiary and its subsidiaries and implementing a wide scale training programme regarding the RPT policy within the company and the Subsidiary.
Listed companies should consider whether their own systems and controls are robust enough to ensure that they are complying with their obligations, particularly in relation to potential RPTs. In particular, companies may wish to consider the following:
- Consider the company's group structure (for example, does the company have any overseas subsidiaries? Are there any key relationships with directors and shareholders at board and subsidiary level?). If so, tailor your RPT policy accordingly and maintain a list of related parties. Ensure that the list is immediately updated whenever a new or potential related party has been identified and is periodically reviewed by the list keeper and the board (or relevant committee).
- Companies must go above and beyond putting an RPT policy (albeit a well drafted one) in place. In order for it to be effective, the policy must be fully implemented at company and subsidiary level. This should involve compulsory training of relevant individuals (both senior and otherwise), maintaining records of attendees and ensuring that non-attendees are subsequently trained. Senior management should be responsible for regularly monitoring the roll-out of training for employees and ensure that training reflects the most up-to-date policy.
- Consider putting a committee in place to oversee the implementation of the RPT policy at group level. The committee should meet regularly to review the related party list and fully engage in their oversight of implementation at group level by following up progress with relevant individuals in the business. Minutes of the meetings should be recorded so that progress can be tracked and followed up at the next meeting.
- Implement checks in your systems and controls to ensure that any potential transaction is analysed at anearly stage to determine whether it falls within the LRs related party regime. These processes should be well documented in the relevant policies and should form part of the content for training.
- Review the process of information flow between the company and its subsidiaries. Is information on your subsidiary's potential transactions being delivered in a timely manner to the company? Is the information sufficient? Are the persons reviewing the information trained on identifying possible issues?
- Always seek advice from your sponsor if there is, or may be, an RPT. When in doubt, consult your sponsor and legal counsel.
- Clear records should be kept of all steps taken in relation to your RPT policy to evidence that your systems and controls enable the company to comply with its obligations. Where a red flag has been identified within your systems – seek advice and pursue a solution immediately.