The FSA has fined Exillon Energy, a premium-listed Isle of Man company, £292,950 for breaching the rules on related party transactions in LR 11 of the Listing Rules.
Following its listing in 2009, Exillon continued a practice it had previously adopted of paying its chairman's personal (not business-related) expenses. At the end of the year, there was then a reconciliation process and these payments were deducted from his salary. If the expenses exceeded his unpaid salary, the chairman repaid the excess with interest.
The FSA concluded that these payments constituted related party transactions. They amounted to a loan from the company to a related party, that is the director. Therefore when they exceeded, in aggregate, more than 0.25% of Exillon's market value, the company should have complied with the rules for smaller related party transactions. It therefore should have notified the FSA of the transactions in writing, with confirmation from an independent adviser that the terms of the transactions were fair and reasonable as far as the Exillon shareholders were concerned, and should have undertaken to include the details in its next annual report.
The FSA also concluded that the company had breached Listing Principle 2 because it had failed to take reasonable steps to establish and maintain procedures, systems and controls to enable it to comply with its related party transaction obligations. It held that the training provided to the operational managers who were responsible for identifying related party transactions was inadequate and as a result they failed to identify the payment of the chairman's expenses as related party transactions.
The notice highlights the importance not only of having policies to assist in compliance with the LPDT Rules but also of ensuring that they are properly implemented. In this case, the FSA said that whilst the company's external lawyers had drafted a policy for the company, the company failed to ensure that its operational managers had the requisite knowledge and understanding of the rules.
The final notice can be found on the FSA's website.
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