On 26 April 2012, the Financial Services Authority (FSA) published a Final Notice imposing a fine on Exillion Energy plc (Exillon) for breach of the Listing Rules as a result of failing to identify around £930,000 of payments to its former Chairman and beneficiary of its major shareholder as related party transactions. This is the first fine imposed by the FSA on a company for breach of the Listing Rules relating 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.
Exillon was admitted to trading on the Main Market of the London Stock Exchange on 17 December 2009. In 2010, Exillon made a series of payments totalling £930,000 to and on behalf of Maksat Arip, Exillon’s then Chairman and a beneficiary of Exillion’s major shareholder. These payments were for private expenses and were the continuation of Exillon’s practice of paying Mr Arip’s private expenses and netting such payments off against his unpaid salary that had operated in Exillon before its listing. These payments constituted related party transactions but were not identified as such by Exillon or its senior officers.
By June 2010, the aggregate amount of these payments totalled £587,627, which exceeded 0.25 per cent of the aggregate market value of all Exillon’s ordinary shares. However, Exillon failed (and subsequently when further expenses payments were made) to comply with the requirements in LR 11.1.10R(2), namely to:
- inform the FSA in writing of the details of the transaction;
- provide the FSA with written confirmation from an independent adviser that the terms of the transaction were fair and reasonable; and
- undertake in writing to the FSA to include details of the transaction in the next published annual accounts.
After that time, Exillion also failed to comply with LR 11.1.11(3) each time it considered making a further payment to Mr Agip. Exillon had policies and procedures in place intended to ensure compliance with the Listing Rules regarding related party transactions. However, from the time of listing and throughout 2010, these policies and procedures did not work in practice since they relied heavily on senior officers to identify and take appropriate action. The senior officers charged with this responsibility lacked the experience and training to perform this function and Exillon did not check that the policies and procedures were effective and had been implemented. Exillon therefore also breached Listing Principle 2 by failing to take reasonable steps to establish and maintain adequate procedures, systems and controls to enable it to comply with its obligations.
In deciding whether a financial penalty was appropriate and proportionate, the FSA considered the five steps to determine the penalty to be imposed on firms set out in chapter 6.5A of its Decision Procedure and Penalties Manual. In relation to Step 2 (where the FSA determines a figure to reflect the seriousness of the breach), the FSA used the value of the related party transactions as the relevant indicator and determined that the breach was a level 3 breach (50 per cent of the value of the related party transactions being £465,000). The FSA viewed Exillon’s conduct as an aggravating feature, owing to the fact that the listing should have been a trigger for it to ensure all its procedures were effective and fully operational and it failed to do so. Exillon’s conduct was, however, mitigated by the following:
- it took a number of remedial steps after the breach was identified to bring its related party transaction compliance procedures up to a high standard;
- its cooperation during the investigation, including waiving privilege over all relevant documents at an early stage without being asked and making Mr Arip available for meetings and interviews at the earliest opportunity (despite him residing overseas), went well beyond the typical level of cooperation experienced by the FSA; and
- Mr Arip repaid the payments with interest before it was brought to Exillon’s attention that they constituted related party transactions.
Accordingly, the FSA reduced the penalty by 10 per cent to £418,500. Exillon agreed to settle at an early stage in the investigation and therefore qualified for a 30 per cent reduction in penalty, thereby reducing the financial penalty to £292,950.
The FSA did not conclude that Mr Arip had acted improperly in relation to the payments made to him, neither was there any evidence to suggest that Mr Arip or Exillon benefited financially from the payments or that Exillon’s shareholders suffered any losses.
(FSA, Final Notice - Exillon Energy plc fine for breach of Listing Rules, 26.04.12)