This is the first time that the Financial Services Authority has imposed a fine for breaches of the related party rules contained in Listing Rule 11 and of the procedures, systems and controls requirement of Listing Principle 2.
Exilion Energy plc, a company admitted to the Main Market of the London Stock Exchange, has been fined £292,950 for “failing to identify around £930,000 of payments to its former Chairman and beneficiary of the major shareholder as related party transactions, and failing to disclose them to the FSA in a timely manner”. FSA press release here and the Final Notice here. From the press release:
“The FSA found that this breach of the Listing Rules occurred because Exillon’s policies and procedures to ensure compliance with the Listing Rules did not work in practice because the senior officers responsible were not adequately trained.
Exillon was admitted to trading on the Main Market of the London Stock Exchange on 17 December 2009. Between 26 January 2010 and 27 December 2010 Exillon made payments totalling £930,000 to and on behalf of Maksat Arip, Exillon’s then Chairman and a beneficiary of the major shareholder. These payments constituted related party transactions.
While some of the payments were used for private expenses such as Mr Arip’s children’s education and private travel, most of the payments were requested for business purposes but were reclassified as private when Mr Arip could not produce receipts showing that the money was used for a business expense. The payments continued an informal arrangement that was in place prior to Exillon’s listing whereby Exillon advanced money to Mr Arip for private purposes and then offset those payments against unpaid salary and Mr Arip paid or received the net balance.
Between October and December 2010 Mr Arip arranged to repay the sums to Exillon with interest. The payments were not, however, identified as related party transactions until 17 February 2011 when Exillon’s auditors wrote to Exillon categorising them as such. On 7 March 2011 Exillon’s sponsor wrote to the FSA advising it that Exillon had categorised the payments as loans to a related party.
The FSA’s view
David Lawton, FSA acting director of markets, said:
“Our related party rules protect minority shareholders in Premium Listed companies by ensuring large shareholders and company directors cannot unfairly benefit from their positions in the corporate governance of a listed company. Compliance with these rules is particularly important for previously closely-held companies whose owners may have been used to entering into informal transactions.
“In this case Exillon fell below the standards we expect. Companies must have systems and controls that enable them to comply fully with the listing rules from the moment of admission. It is not enough to have detailed compliance procedures drafted by experienced advisors sitting on the shelf.”
First fine for breaches of RPT and systems and controls rules
As the FSA states, this fine “is the first fine imposed by the FSA on a company for breach of rules pertaining to related party transactions and the first time a company has been fined for failing to establish and maintain the systems and controls necessary to comply with the Listing Rules”.
Listing Rule 11.1.11R requires listed companies to aggregate transactions with the same related party in 12 month period. To the extent that such transactions exceed 0.25% of any of the percentage ratios in Listing Rule 10, Listing Rule 11.1.11R(3) requires the company to inform the FSA of the details of the aggregated transactions, provide a written confirmation from an independent adviser that the terms of the transaction were fair and reasonable; and undertake to include details of the transactions in the next published annual accounts. Listing Principle 2 states that a listed company must take reasonable steps to establish and maintain adequate procedures, systems and controls to enable it to comply with its obligations.