STOCK EXCHANGE LISTING MANUAL (Guidelines relating to interested party transactions)

The following Question stood in the name of Mr Stephen Lee Ching Yen:--

Mr Stephen Lee Ching Yen: To ask the Minister for Finance whether the Stock Exchange of Singapore will provide a set of guidelines to exclude certain transactions from Rule 10-10 of the Stock Exchange Listing Manual relating to interested party transactions.

Dr Kanwaljit Soin (Nominated Member): Question No. 3, Sir.

The Minister for Finance (Dr Richard Hu Tsu Tau): Mr Speaker, Sir, Mr Stephen Lee has asked whether the Stock Exchange of Singapore (SES) will issue new guidelines to exempt certain related-party transactions which are now covered under Clause 1010 of the Listing Manual. A transaction caught under this clause requires the approval of independent shareholders at the general meeting unless a waiver has been granted by the Stock Exchange.

I am sure that Mr Lee would be aware by now that the Stock Exchange had issued a new set of guidelines on the sale of properties to connected persons and directors' relatives on 22nd April 1996, and subsequently, a revised Clause 1010 on 26th April 1996.

After studying the operation of Clause 1010 in the past and similar rules in other jurisdictions such as the United Kingdom, Australia and Hong Kong, the SES issued an amended Clause 1010 which provides for a new two-tier system to regulate related-party transactions. Under this system, related-party transactions below the lower of $500,000 or 3% of the latest net total assets (NTA) of the listed company will not require shareholders' approval but only disclosure in the annual report by aggregating transactions with the same related party, where each transaction exceeds $5,000. Related-party transactions which fall between this first-tier and the lower of $3 million or 5% of NTA will not require shareholders' approval but must be announced immediately. Only related-party transactions above $3 million or 5% of NTA, whichever is lower, will require shareholders' approval.

Based on the Stock Exchange's estimate, the new clause will reduce the number of related-party transactions which require shareholders' approval considerably. If the new two-tier system had been in place, only 22%, (or 38 cases) of the 172 related-party transactions last year would have required shareholders' approval.

However, to be consistent with the Stock Exchange's latest guidelines on the sale of properties to connected persons and directors' relatives, this new two-tier system will not apply to sale of properties to connected persons. All such property sales must be approved by shareholders regardless of the value of the transactions. The Stock Exchange is of the view that sale of properties is different from other related-party transactions because properties are not homogenous products and the pricing of properties is complex and subject to frequent market changes. Furthermore, there have been public complaints about listed companies selling properties to related parties at discounts and giving them priority in selecting and booking properties. As such, the SES considers it more appropriate to subject all property sales by listed companies to related parties to shareholders' approval.

Unlike the SES' guidelines on the sale of properties to connected persons, (which requires shareholders' approval for such sales to be obtained within six weeks of the sale or proposed sale) the new Clause 1010 does not specify any time period within which shareholders' approval must be obtained. This is because Clause 1010 applies to all related-party transactions, most of which require opinions from independent financial advisers and independent directors. As such transactions and their terms are usually much more complicated than property transactions, independent opinions can normally be given only after detailed evaluation and due diligence. This may require considerable time. Furthermore, some related party-transactions involving the acquisition of foreign assets by the listed company may be subject to approval by the authorities here. The timing of such approvals is therefore frequently beyond the listed company's control.

Except for these two differences, all other requirements under the revised Clause 1010 will also apply to listed companies' sale of properties to their connected persons.

In addition to the new two-tier system, the SES will exempt certain related-party transactions where conflicts of interest are immaterial from Clause 1010. The main categories of transactions that will be exempted are as follows:--

(a) the grant of options, and issue of shares pursuant to the exercise of options under an employee share option scheme approved by the Stock Exchange;

(b) transactions between a listed company and its partly-owned subsidiary or associated company if none of the listed company's substantial shareholders or director is a substantial shareholder of that partly-owned subsidiary or associated company in his personal capacity;

(c) transactions between a listed company and another company where the only connection between the two is certain common directors who in aggregate own less than 5% of either company;

(d) provision of financial services by a financial institution in Singapore on normal commercial terms and in the ordinary course of business; and

(e) transactions with past directors and substantial shareholders.

I trust this answers Mr Lee's question.

Mr Low Thia Khiang: Sir, I recall the same statement issued by SES which cited a grant of waiver of shareholders' approval to HPL for the transaction by the Senior Minister in Nassim Jade and, subsequently, the same principle was applied to Scotts 28. The reason given was that SM was financially independent from the brother who is the non executive director. I would like to know from the Minister what is the Stock Exchange's definition for "financially independent". Are there any guidelines and what do they mean by "financially independent"? Also, I would like to ask whether the principle for granting the waiver, based on financial independence, is a prudent guideline.

Dr Richard Hu Tsu Tau: Sir, the normal interpretation of "financial dependence" would be the dependence of a child on the parents. In other words, a child is dependent on the parent. Therefore, if the parent buys something on behalf of the child, the child is dependent. Another sibling or relative who is not financially dependent acts on his own, in other words, he buys things on his own account. Therefore, there is no linkage in that sense. That is the general guideline and I think it is quite a prudent and adequate one.

Mr Low Thia Khiang: If a wife is independent financially from the husband, for example, and she buys a property, would the transaction require the shareholders' approval?

Dr Richard Hu Tsu Tau: The wife is considered in law as part of the husband because they are not divisible. In other words, the wife would be a dependant in that sense.

Mr Low Thia Khiang: Is the Minister saying that this principle of financial independence applies only to sons and other relatives, and not the wife?

Dr Richard Hu Tsu Tau: Sons and wife, immediate family.