Published August 14, 2008

Better disclosure needed on share payment scheme

By JAMIE LEE
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CORPORATE finance firm PrimePartners, in receiving shares in lieu of cash as payment for acting as sponsor for the IPO of Healthway Medical Corporation, has raised some eyebrows in the market. That's chiefly because of concerns that such an arrangement could potentially compromise its role as a sponsor of listings on Catalist, the junior board of the Singapore Exchange (SGX).

There is good reason for concern. On Catalist, sponsors have to play a role previously occupied by the exchange, acting as regulators of companies that they take public. With a potential $2.72 million at stake, sceptics have raised the question of whether a conflict of interest exists and whether PrimePartners would be distracted by any volatility in the share price which might result from PrimePartners' advice on Healthway's financial decisions.

'Having a sponsor own shares in the company is like SGX owning shares in the companies they regulate and is definitely a bad idea,' said Mak Yuen Teen, co-director of the Corporate Governance and Financial Reporting Centre at the National University of Singapore business school. 'I don't buy the 'alignment of interests' argument. Are we saying that the sponsor needs shares to incentivise it to take its responsibilities seriously?'

Still, the arrangement between PrimePartners and Healthway illustrates a Catch-22 situation that fledgling companies find themselves in. Many small firms are going for a listing precisely to raise capital and thus might choose to preserve their cash by issuing shares. They can be criticised for this, but there appear to be defensible reasons for taking this route given their lean cash position in the first place.

From PrimePartners' perspective, it's a good way to get a return from listing Catalist companies and they argue that, for them as professionals, the reputational risk is greater than the temptation to do wrong. Also, SGX in implicitly giving the green light to the arrangement suggests that there is regulatory faith in the sponsors' integrity, or at the very least, that PrimePartners can discharge its fiduciary duties satisfactorily.

But even assuming that the conflict- of-interest concerns are exaggerated, then it has to be said that PrimePartners should have been clearer about the share payment scheme since any eventual sale by PrimePartners of the 7.56 million shares will create a share overhang and dilute existing shareholdings. Instead, the information was revealed only on page 49, tucked under footnote 9.

While there is no doubt that PrimePartners has adhered to current disclosure guidelines - the data was found in the prospectus - it would be reasonable to expect that few investors would have noted the information, given that it was buried deep inside the document. And prospective investors should not have to scour the fine print in an IPO prospectus for material information; the onus should be on the sponsors to disclose this upfront.

This is all the more so with sponsors having a greater role to play in today's disclosure-driven regime, as they baby- sit smaller companies and mentor them in their business decisions.

As Catalist's first-line quality-control providers, PrimePartners and all sponsors should hold themselves up to a higher standard, rather than simply make obligatory compliances with guidelines.

And because more of such deals are expected to come to the market, SGX should make clear its view on such 'shares-as-payment' arrangements.

The market knows that, in principle, SGX has chosen to take the backseat in Catalist listings. But given that Catalist is a new and constantly evolving concept, greater clarity on such share payments would help to reassure the market and investors that fears of a conflict of interest are unfounded from SGX's perspective.