FCA issues £4.6m fine for failure to implement related party transactions policy

The Financial Conduct Authority has imposed a £4.6m fine on Asia Resource Minerals plc (formerly Bumi plc) for Listing Rule and DTR breaches arising from its failure to properly implement its related party transactions policy. The FCA’s decision highlights the importance of ensuring that listed companies not only have policies for related party transactions but also implement them effectively, particularly in subsidiaries that have local management teams unfamiliar with the Listing Rules. It also serves as a reminder of the importance of seeking the guidance of a sponsor in relation to potential transactions with a related party.

Which rules were breached?

The fine is for breaches of the following rules:

  • LR 11.1.10R (requirements for smaller related party transactions);
  • LR 11.1.11R (aggregation of related party transactions); 
  • LR 8.2.3R (sponsor’s guidance to be sought on proposed related party transactions);
  • 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); and
  • DTR 4.1.3R (annual report to be published within four months of year-end).

How did the Company breach the rules?

The breaches stem from the failure to properly implement the related party transaction policy the Company adopted prior to listing in June 2011.

Processes were established but were not adequately followed through. For example, a conflicts committee was set up to establish and maintain a process for administering related party transactions, but this was ineffective as the committee did not meet frequently enough and was hampered by a lack of disclosure by former managers of the Company’s Indonesian subsidiary, PT Berau Coal Energy TbK. Similarly, a pre-IPO training workshop for directors and senior management was held, but key members of the board of PT Berau Coal did not attend the session. The FCA highlighted that this absence was not followed up and there were no records that the training was repeated for them.

The FCA also found that there was an increased risk of undetected related party transactions occurring because:

  • the directors of PT Berau Coal were unfamiliar with the Listing Rules; and
  • directors of both Asia Resource Minerals and PT Berau Coal held board or other senior management positions at companies in the same industry in Indonesia, meaning that there were many related parties with which PT Berau Coal could transact.

One of the main criticisms made by the FCA was that this increased risk should have made the Company especially alive to the need to manage related party transactions but, despite this, measures were put in place too late and/or were inadequate. For example, it was agreed that senior individuals from the Company would be appointed as directors of PT Berau Coal to provide oversight and control, but this did not take place until 15 months after it had been agreed by the Company.

Following an internal review, the Company discovered and reported to its financial advisers a schedule of historic transactions that were entered into with related parties. The financial advisers determined that three of these transactions were in fact related party transactions.

Given that the Company had been unaware of the transactions in question at the time they were entered into, the relevant rules in LR 11 (for example, the requirement to notify the FCA and provide a fair and reasonable opinion from an independent adviser under LR 11.1.10R, as was then in force) had not been followed in respect of the three related party transactions.

In addition, no sponsor had been appointed to provide guidance to the Company, as is required by LR 8.2.3R whenever an issuer is proposing to enter into a transaction that is, or may be, a related party transaction. It is important to note that the FCA concluded that the Company had breached LR 8.2.3R in relation to both the transactions that were in fact related party transactions, and those that were not (but might have been).

As a result of the discovery of these transactions, and other financial irregularities in its Indonesian operations, the Company had to delay publishing its 2012 annual report (and so breached DTR 4.1.3R). This delay also led to its shares being suspended from trading.

The FCA drew attention to its April 2012 final notice in respect of Exillon Energy plc which covered similar points. While the Company had circulated this notice to senior management with a reminder of the importance of ensuring compliance with the Listing Rules, the FCA found that no further substantive steps were taken to ensure the effectiveness of the group’s processes for related party transactions. The FCA considered this failure to be an aggravating factor, resulting in an increased level of fine. The FCA also highlighted a number of red flags that the Company did not respond to, such as concerns raised by the auditors. 

Should other listed companies be worried?

The breaches of the Listing Rules, Listing Principles and DTR 4.1.3R in this instance are clear, as are the weaknesses in the implementation of the related party transaction policy that led to them.

However, the decision does highlight that having well-drafted policies is of no use if they are not put into practice and maintained. Listed companies should ensure that their procedures are working as intended throughout the group, and that training is effective and repeated in order to reinforce the key points. The decision also highlights the need for extra diligence where a listed company has subsidiaries in jurisdictions where these rules are unfamiliar, and/or where directors of group companies hold positions with other companies in the same sector or region.

Although the Listing Rules do not mandate companies to maintain up to date lists of all related parties, in this case it was required by the Company’s policy and highlighted by the FCA as an important part of its achieving compliance with the Listing Rules. For some issuers, the identity of the related parties and dynamic nature of the list may make it extremely difficult to maintain an accurate record of all related parties. In those cases companies will need to implement other measures in order to comply with the requirement to take reasonable steps to establish and maintain adequate procedures, systems and controls.

This decision also serves as a reminder of the importance of seeking the guidance of a sponsor in relation to potential transactions with a related party. Helpfully, the FCA notes that “a listed company may itself be well placed to determine whether a transaction is a related party transaction”, for example it may be clear to a company that a transaction is exempt as a small transaction (less than 0.25% on all class tests) or a transaction in the ordinary course of business. However, the guidance of a sponsor should always be obtained where there is “sufficient uncertainty as to whether a proposed transaction is a related party transaction”. This highlights the need to appoint a sponsor other than where the status of a proposed transaction is clear.

The decision against Asia Resource Minerals should act as a prompt to other listed companies to consider their procedures and make any necessary improvements.

Click here for the final notice.

Click here for the FCA’s press release.