A. SGX enhances listing rules to strengthen corporate governance practice

In the Board Matters Quarterly Issue 2 , we highlighted that the SGX has issued a consultation paper on 9 December 2009 to propose new measures and rule amendments to strengthen corporate governance practice (SGX Consultation Paper). We also discussed our comments on the selected SGX key proposals in the Board Matters Quarterly Issue 3.

On 14 September 2011, the SGX announced that it has finalized the amendments to the listing rules (http://www.sgx.com/wps/wcm/connect/sgx_en/home/higlights/
news_releases/sgx+enhanced+listing+rules+to+strengthen+corporate+governance+practice) to strengthen corporate governance practices and foster greater corporate disclosure.

The amendments to the listing rules apply to disclosures in the issuers’ announcements, prospectus, offering memorandum and introductory document, and annual reports. According to the SGX’s press release, the amendments to the listing rules are effective from 29 September 2011, and it will apply to the Mainboard Listing Rules. The same amendments will apply to the Catalist Rules where applicable.

On 9 September 2011, in response to queries on the implementation of the changes to the listing rules, the SGX provided clarifications on the timeline for meeting the new disclosure requirements in the annual reports and the scope of the disclosure of loan covenants linked to controlling shareholders. The SGX clarifies that:

• The new disclosure requirements in the annual reports will only be required for listed companies with a financial year ending on or after 31 December 2011. However, listed companies are encouraged to incorporate the new disclosure requirements in their annual reports as soon as possible.
• The scope to the disclosure of loan covenants linked to controlling shareholders applies to both existing and new loans. For details, please refer to “Disclosure of loan covenants linked to controlling shareholders” in page 6.

Some of the key amendments to the listing rules include:
 

Internal control

• Require an issuer to have a robust and effective system of internal controls, addressing financial, operational and compliance risks. The Audit Committee (AC) (or such other committee responsible) may commission an independent audit on internal controls for its assurance, or where it is not satisfied with the systems of internal control.
• Require the board, with the concurrence of the AC, to provide their opinion in the prospectus, offering memorandum and introductory document, and annual report on the adequacy of the internal controls, addressing financial, operational and compliance risks of the issuer, and its principal subsidiaries.

Information on legal representative(s)

• Require an issuer to:
  • Disclose the information relating to the legal representative(s) of the issuer and/or its principal subsidiaries.
  • Provide a description of the processes and procedures in place to mitigate the risks in relation to the appointment of legal representative(s).
  • Provide an opinion on the adequacy of the processes and procedures in the prospectus, offering memorandum and introductory document.

• Require an issuer to make an immediate announcement of any appointment, or change in legal representative.

Independent directors (ID) of the issuer sitting on the board of its overseas principal subsidiaries 

• Require an issuer to:
  • Disclose a statement in the prospectus, offering memorandum and introductory document whether any of the ID of the issuer sits on the board of its principal subsidiaries that are based in jurisdictions other than Singapore.
  • Make an immediate announcement of when an independent director of the issuer is appointed to, or ceases to be on the board of its principal subsidiaries that are based in jurisdictions other than Singapore.

Disclosure of loan covenants linked to controlling shareholders

• Require an issuer to make an immediate announcement:
  • When the issuer or any of its subsidiaries enters into loan agreements, or issues debt securities that contain a condition that makes reference to the controlling shareholder interest or places restrictions on any change in controls of the issuer, and where the breach of this condition or restriction will cause a default in respect of the loan agreement or debt securities.
  • If there is any breach of the terms of loan agreements or debt issues which may have a significant impact on the operations of the issuer.
• Require an issuer to obtain an undertaking from its controlling shareholder(s) to notify the issuer, as soon as it becomes aware, of any share pledging arrangements relating to these shares, and of any event which may result in a breach of the issuer’s loan covenants.
  • Upon the notification by the controlling shareholder(s), require an issuer to make an immediate announcement of the details of the arrangements.

No transfer of securities during trading suspension

• Where the trading of shares of an issuer is suspended, there must not be any transfers of securities, unless approved by SGX.

Codify SGX’s powers to take actions against directors and key executive officers

• Under specific circumstances such as where the issuer is the subject of an investigation due to irregularities or other wrongdoings, the SGX may require an issuer to obtain the approval of SGX for the appointment of a director, a chief executive officer and chief financial officer (CFO) (or its equivalent rank).
• Codify the SGX’s right to take action against directors or key executive officers, such as public censure or objecting to their appointment to the boards of other issuers.

Negative confirmation on the suitability of the CFO

• Require an issuer’s AC to disclose a negative statement in the prospectus, offering memorandum and introductory document on the competence, character and integrity of the CFO.

SGX provides details on what constitutes a suitable auditing firm

• Require auditing firms appointed by the issuer to be:
  • Registered with the Accounting and Corporate Regulatory Authority; or
  • Registered with and/or regulated by an independent audit oversight body acceptable to the SGX; or
  • Any other auditing firms acceptable by the SGX.

• Require an issuer to provide a statement in the annual report and notice of meeting for the proposed change of auditors that it complies with listing requirements in relation to the appointment of auditing firms.
• Require a confirmation by the board and the issue manager that the listing applicant complies with the listing requirements in relation to the appointment of auditing firms.

Disclosure of audit fees paid to auditors

• Require an issuer to disclose in the annual report the audit fees paid to the auditors.

Enhance disclosure requirements for quarterly and the full year announcements

• Require the issuer to disclose in the quarterly and full year announcements whether the group has obtained a general mandate from shareholders for Interested Person Transactions (IPT), and the aggregate value of such transactions. If no IPT mandate has been obtained, a statement is required.
• Require the issuer to disclose the details of the person occupying a managerial position in the issuer, or any of its principal subsidiaries who is a relative of a director or CEO or substantial shareholder of the issuer in the issuer’s full year announcement. If there is no such person, the issuer must make an appropriate negative statement.

Set minimum issue size for each tranche of Medium Term Note listed

• Require the principal amount of each listed series of a Medium Term Note Program to be at least S$5 million.

Right of First Refusal (ROFR) agreements for real estate investment trusts (REIT) and business trusts

• Codify the use of ROFR agreements to address conflict of interest situations for REIT and business trusts, and introduce New Practice Note 4.1 to provide guidance on the applicability of the ROFR.
  
  ROFR
  • For any disposal of assets owned by the controlling unit holder and/or any of its subsidiaries that would fall within the investment mandate (the competing assets), the SGX considers a ROFR granted by the controlling unit holder to the Manager of the Trust will effectively mitigate the conflict of interest when the ROFR:
    

    (a)	Gives the Trust the first right to acquire the competing assets from the controlling unit holder and/or any of its subsidiaries.
    (b)	Is valid as long as the manager remains the manager of the Trusts, and the controlling unit holder together with its related corporations remains a controlling shareholder of the Manager.

Profit estimates, forecasts and projections for investment funds, REIT and business trusts

• In the event the investment funds, REIT, or business trusts are unable to provide the annual accounts or proforma financial statements for each of the last 3 financial years when applying for listing, they are expected to provide profit estimates, forecasts and projections.
  • Introduce New Practice Note 4.1 to provide guidance on requirements for profit estimates, forecasts and projections to be provided in the absence of historical financial information.

Details of the amendments to the listing rules are available on the SGX website 
(http://rulebook.sgx.com/net_file_store/new_rulebooks/s/g/SGX_Mainboard_rules_September_29_2011.pdf).

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