The FSA has announced today that it has imposed a fine of £292,950 on Exillon Energy plc (Exillon) for failing to identify around £930,000 of payments to Maksat Arip, 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. The FSA found that between 26 January 2010 and 27 December 2010 Exillon made certain payments totalling £930,000 to Mr Arip. Whilst most of the payments were requested for business purposes, they 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.
The FSA concluded that such payments constituted loans to a related party. 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. Listing Rule 11.1.11R requires listed companies to aggregate transactions with the same related party in a 12 month period. To the extent that such transactions exceed 0.25% of any of the ''class tests', 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 (typically the sponsor) that the terms of the transaction were fair and reasonable; and undertake to include details of the transactions in the next published annual accounts.
Exillon's internal compliance team failed to appreciate the nature of the payments made and the consequential disclosure obligations under the Listing Rules. Accordingly, the FSA imposed its fine on the basis that 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. This is the first time that the FSA has imposed a fine on a company for breach of rules pertaining to related party transactions and the first time that a company has been fined for its failure to put in place the systems and controls required to comply with the Listing Rules.
This case highlights both the breadth of the related party rules and the increasing focus of the FSA on compliance with the Listing Rules by issuers and sponsors. Relatively informal business arrangements are often caught by the related party rules so issuers and advisers need to be mindful of the rules.