Across the border, both the investment and legal fraternity are watching the war that has emerged between the Singapore Exchange (SGX) and a S-chip.

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The issue began at the end of last year when the regulators directed the company to appoint a special auditor. The regulator was dissatisfied with the responses to its queries about various interested-party transactions, and an aborted land deal. The regulator also wanted the special auditor to look into the transactions between the company and its Audit Committee Chairman, whose own company provided some services.

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Our review of this dispute indicated that the initial reaction by the company to SGX's directive was to suspend trading on Nov 17. Its board also announced that it would give the SGX further particulars on its queries and would also seek legal and professional advice on the matter.

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A few days later that same month, the company announced that it had appointed a law firm, but notably still failed to address the directive of appointing a special auditor.

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The regulator, then publicly reprimanded the company and its board members for flagrantly disregarding its directive. In doing so, the regulator stated that the company had written three letters in early December to make it clear that it would not comply with its requests. In these letters, the S-chip also instructed the regulator to direct all further communication to the company's lawyers.

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In its public reprimand, the regulator retorted that it would continue to communicate directly with any officer of any listed company as it deemed fit, and would not allow any company listed to tell it how it should regulate issuers.

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Five days later, the S-chip responded by disagreeing totally with the regulator's reprimand, saying that the dressing-down was unwarranted, done without merit and showed clearly a total disregard for shareholders' interests.

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The fearless S-chip pressed on with another announcement, stating that some of the regulator's demands were “extremely unreasonable”, while maintaining that there had not been any allegation of accounting irregularities or fraudulent practices by the company. It also stated in this announcement that “an appointment of special auditors would be unwarranted and clearly not in the best interest of the company and its shareholders”.

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Then, at the end of the year, the regulator set an ultimatum for the company to comply with its directive by January 5, 2012. Things came to a head on Jan 5, the regulator's deadline, when all three of the S-chip's independent directors quit, citing the company's non-compliance with the bourse's order for special auditors.

The next day, the regulator sued the company to compel it to have special auditors to investigate the three outstanding issues. Also, the company and all its directors were now under a criminal probe into possible regulatory breaches under Singapore's Securities and Futures Act.

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But here comes a twist in the story. In the middle of January, the regulator withdrew its lawsuit without specifying a reason. All the public knew was that lawyers from both sides met after the S-chip ignored the regulator's Jan 5 ultimatum.

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Adding fat to the fire, one of the company's independent directors, who had quit, demanded a public apology from the regulator and sued the bourse when his request was ignored. Indeed, his many attempts to get the bourse to withdraw the public reprimand, and issue an open and unqualified apology to him went unheeded. Hearing of this lawsuit in the High Court between the independent director and the regulator started mid April.

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The independent director will argue that the regulator had breached the rules of natural justice by not notifying him properly of its imminent public reprimand, and as such, he did not have a chance to respond to its concerns.

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Trading of the company's shares is still suspended at time of writing. Investors, of course, want to know why the regulator has dropped its suit against this S-chip.

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• Why the change in decision?

• What happens when a regulator changes its stance against a company after publicly reprimanding its directors?

• Was the reprimand based on an impression?

 

We then reviewed another public reprimand of directors, and noted that another regulator took company directors to task when they were 48 hours late in disclosing that they had lost a foreign contract.

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In the two days delay, there was very little share price movement, yet the regulators still proceeded with the public reprimand. We had to ask, “Was the public reprimand completely necessary considering the scale of the breach and there were valid reasons given for the delay?”

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Clearly, issues handled like this will only spook investors, and one has to wonder why closed-door mediation wasn't used. Public reprimands constitute a permanent blemish on directors' record, and can adversely affect their livelihood. These reprimands should only be issued once all the facts are properly assessed to ensure that due process is observed and that there is truly substance in the enforcement and not just form.

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As the exchange “is under a duty to act fairly”, questions are being asked if in fact, the regulator has been “tyrannous in the use of its strength”.

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One thing certain, the stakes in this S-chip court case are very high for both sides, with wide ranging consequences on what a regulator will or will not be able to do.