The Financial Services Authority (FSA) has imposed the first ever fine on a listed company for breaching the related party transaction rules, and for failing to establish and maintain the systems and controls necessary to comply with the Listing Rules. The case clearly illustrates the importance for companies coming to the market of adopting appropriate systems and controls and ensuring that these are adequately understood by senior personnel.
Premium listed, AIM and PLUS markets companies are all required to identify related party transactions. Whilst the various Rules differ in their specific details, related party transactions include transactions between the quoted company and certain significant shareholders, main board and subsidiary directors, or their associates. Depending on the significance of the transaction (or transactions aggregated over the course of a year), the Rules may then require the quoted company to seek shareholder approval and/or notify the market or the FSA, and may require confirmation that the terms of the transaction are fair and reasonable.
In the year following its listing in December 2009, Exillon Energy plc (Exillon) made payments to its chairman totalling £930,000. Some of the payments were for private expenses from the outset. Most were requested for business purposes but were reclassified as private when the chairman could not produce receipts showing that the money was used for a business expense. The payments continued an informal arrangement in place prior to Exillon's listing, whereby the company advanced money to the chairman for private purposes and then offset those payments against unpaid salary and the chairman paid or received the net balance.
In accordance with that informal arrangement, the chairman repaid all the sums, with interest, in the final quarter of 2010. The FSA did not conclude that he had acted improperly in relation to the payments made to him, nor was there any evidence to suggest that he or the company benefited financially from the payments or that Exillon's shareholders suffered any losses.
The payments were not, however, identified as related party transactions until February 2011, when the company's auditors wrote to it categorising them as such. The company was therefore in breach of its obligations under the Listing Rules to inform the FSA in a timely manner. It was fined £292,950 for this breach, the penalty being reduced by 30% from £418,500 as the company agreed to settle at an early stage in the investigation.
The FSA found that Exillon had adopted policies and procedures to ensure compliance with the Listing Rules, but that these did not work in practice because the senior officers responsible were not adequately trained and the policies and procedures were not properly implemented. To quote David Lawton, FSA acting director of markets: "It is not enough to have detailed compliance procedures drafted by experienced advisors sitting on the shelf."
Click here for the final notice for Exillon energy plc.
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