April 27, 2012 FSA makes first fine for related party transactions
The FSA has fined Exillon Energy plc (“Exillon“) £292,950 for failing to disclose related party transactions in a breach of corporate governance principles and the listing rules. This is the first time that the FSA has imposed a fine for a breach of the rules relating to related party transactions and it would have been higher (£418,500) if it wasn’t for a 30% early settlement discount agreed between the FSA and Exillon.
Exillon is a FTSE 250 Russian focused oil explorer that listed on the London Stock Exchange in December 2009. Although the FSA found that Exillon had proper disclosure rules in place, the Russian speaking managers had not received adequate training in how to implement them.
David Lawton, acting director of markets at the FSA, 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.
Maksat Arip the then Chairman of Exillon and beneficiary of Exillon’s major shareholder, had received a total of £930,000 from Exillon. This was a continuation of a practice that had been carried out while the company was still private of paying Mr Arip for private expenses and then offsetting these payments against future salary and dividends.
Between October and December 2010, Mr Arip arranged to repay the full amount with interest. The FSA did not conclude that Mr Arip has acted improperly or that any of Exillon’s shareholders had suffered any financial loss as a result of the transactions. However, they were related party transactions and were not identified as such until 17 February 2011 when Exillon’s auditors wrote to the company and classified them as such.
This incident will only add to the concern that some overseas companies that have listed on the London Stock Exchange are failing to live up to the corporate governance standards that are expected in the UK.