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SGX RegCo expects timely, adequate disclosure of significant litigation

SGX RegCo expects timely, adequate disclosure of significant litigation

Source: Business Times
Article Date: 06 Feb 2020
Author: Tay Peck Gek

RegCo chief Tan Boon Gin wrote that public companies have to disclose not only materially price-sensitive information but also trade-sensitive facts come Feb 7.

Singapore's frontline market regulator is serving notice on listed companies that they must make timely disclosure and provide sufficient details when it comes to significant litigation.

This comes after Sembcorp Industries (SCI) made a regulatory filing on Jan 17 on its joint venture's pollution offences in China. That disclosure followed queries from The Business Times on the back of a Chinese news report that SCI's appeal had been dismissed with a S$10 million fine affirmed in mid-October last year while its multi-million dollar civil claims were being settled.

In a regulator's column that will be put up on Feb 6, Singapore Exchange Regulation (SGX RegCo) chief executive Tan Boon Gin, without identifying any company by name, wrote that public companies have to disclose not only materially price-sensitive information but also trade-sensitive facts come Feb 7 when amendments to the disclosure rules take effect.

By trade-sensitive information, the regulator refers to facts that would likely influence investors' decisions on whether or not to trade the securities - even if there is no material price impact when the facts are made public.

"As a guiding principle, listed companies are expected to assess whether a reasonable investor would expect the information to be disclosed and would the failure to disclose or omission of material facts lead to the establishment of a false market, " wrote Mr Tan.

He noted that while trade-sensitive disclosure is less well-known than the price-sensitive requirement, the former is "no less important".

He illustrated the application of these two tests using an example of a company that is involved in a legal action, and set out some factors for a listed company to assess whether or not the litigation is material enough to warrant disclosure.

These factors include whether the litigation will undermine the ability of the company to continue its business operations and comply with the law, its reputation as well as its viability and business prospects; the type of proceedings; severity of the offence if it is criminal in nature; and the quantum at stake vis-a-vis its financial performance indicators such as revenue and earnings.

A listed company may in its disclosure announce a provision for ongoing litigation and quantify the potential maximum financial impact, but SGX RegCo said this is not adequate to satisfy both price- and trade-sensitivity tests.

To fully comply with disclosure obligations, listed companies must also in a "timely" manner provide "sufficient details" of significant litigation for investors to understand the matter at hand and its associated risks, the regulator said.

Further, companies must avoid omitting important and unfavourable facts or downplaying them, by "burying" them in the financial statements or footnotes of the annual report, for example.

It is noteworthy that firms should furnish updates on material developments in the litigation, even if the potential financial exposure had earlier been disclosed or provided for, or the proceedings have not concluded.

Mr Tan wrote: "We have seen at least one recent case where a listed company probably only considered the price-sensitivity test in deciding whether to make a disclosure, when applying the second trade-sensitivity test might have led to a different disclosure approach."

One critical observation of mainboard-listed SCI's pollution violations disclosure was that it was bereft of details and therefore lacking completeness and accuracy. Although SCI had provided for the whopping fine and settlement claims, there was no announcement at first. The proceedings were first mentioned in the "Notes to the consolidated income statement" in its 2017 financial statements.

After a disclosure was made in September 2018 before the criminal hearing started, there were no interim updates - until BT enquired.

SGX RegCo's Mr Tan reiterated that the responsibility to comply with disclosure obligations is that of the listed company and its board, not its external legal advisers'.

And his advice to them: when in doubt about whether the information is material or warrants making it known - disclose it immediately.

Source: Business Times © Singapore Press Holdings Ltd. Permission required for reproduction.

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