Take care that so-called white knights don’t circumvent tougher due diligence standards

THE more stringent due diligence standards for corporate finance (CF) advisers have drawn mixed reactions from market commentators, based on the story published in The Business Times on Mar 16.

The Monetary Authority of Singapore (MAS) on Feb 23 said it will apply new standards to CF advisers acting in the capacity of manager, sponsor or financial adviser for IPOs, reverse takeovers (RTOs) and business combinations. The new rules codify and provide clear guard rails for advisers involved in such major capital market transactions on the standards of care and regulatory compliance required. This is to be applauded.

There is a need, however, for MAS and/or Singapore Exchange Regulation (SGX RegCo) to supplement the new rules with regulatory directives to make clear that creative CF advisers should not circumvent the rigorous compliance for RTOs.

CF advisers might do so by advising purported white knights to first acquire a controlling stake in an issuer that has lost its core business and/or has been suspended.

After acquiring control, this purported white knight might structure one or a series of business or asset acquisitions that would substantively change the core business and risk profile of the issuer without undertaking a proper RTO.

Proposed white-knight investors who purport to rescue ailing issuers should be required to disclose publicly whether there are plans to inject new assets and/or businesses into the listed company within the next 12 to 24 months.

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This disclosure must be done before a white-wash waiver is granted by the Securities Industry Council to allow the new investor to acquire its controlling stake without making an offer for all the other shares.

The disclosure should also precede listing approval from SGX RegCo for any new controlling equity stake proposed to be issued to the new investor, and before any proposal for the resumption of trading is submitted or approved by SGX RegCo for suspended issuers.

SGX RegCo should be given the thumbs up for being rigorous in scrutinising resumption of trading proposals to ensure an issuer’s risk profile has not materially changed and the key revenue-generating operations of a suspended issuer will continue to be viable and sustainable post-resumption of trading.

In the spirit of the new rules announced recently, it is necessary to hold CF advisers accountable to ensure any clients who are purported white knights make such full and complete public disclosures. For a Catalist-listed issuer, the sponsor must play a proactive part to safeguard the spirit of compliance and due diligence.

At the end of the day, as certain commentators have said, it is better to have quality companies list on our local bourse than having a higher quantity of listings that do not measure up.

Singapore’s regulators have consistently maintained very high standards of market integrity and conduct by rigorous policing of rules and stringent enforcement actions. There must be no let-up in such strict market standards of discipline and conduct.

CF advisers must correspondingly be required to do their part to uphold high industry standards that underpin the foundational sterling reputation of the Singapore capital and financial markets.

The author is a partner at Kennedys Legal Solutions