A recent dispute between SCAN Associates Bhd and Bursa Malaysia Bhd now looks set to be a long-drawn-out affair. The IT security service provider is issuing a writ of summons against the regulator after the High Court denied its request for an injunction against being classified a Guidance Note 3 (GN3) company.

SCAN Associates’ largest shareholder with a 15.2% stake, Mak Siew Wei, confirmed the move.

Various sources tell The Edge that Bursa believes the lawsuit is without merit and intends to have it struck out. If SCAN Associates (fundamental: 0; valuation: 0.3) proceeds with the suit, it would probably be one of the few times an affected issuer has gone to court to challenge the regulator’s listing requirements and decision-making process.

Questions will also be raised as to whether Bursa is acting in the interests of minority shareholders and if companies should be given a chance to negotiate with it prior to any classification being made official.

Mak tells The Edge that despite the court proceedings, the company will comply with its GN3 classification. “All I can say is that the facts are in the affidavit and we are doing this in the best interests of SCAN’s shareholders. We intend to go all the way [on the lawsuit].”

He, however, did not reveal any details of how to keep SCAN Associates going, given its dwindling cash pile, which stood at just RM509,000 as at Dec 31, 2014. The IT security company’s earnings weakened over the past year after it lost key contracts and staff. “[Capital injection] is a possibility. The company was cutting costs even before the GN3 ruling, which just made our situation more difficult,” he says.

In a May 22 note, the Minority Shareholder Watchdog Group says Bursa was right to enforce the GN3 classification. “One of its objectives is to protect the interests of minority shareholders and it does so by enforcing disclosure rules. Investors will thus be able to make informed decisions.”

SCAN Associates was obliged to inform the regulator if it had triggered GN3 status, says a capital market expert, adding that “inadequate engagement” may have resulted in its failure to comply. “There was already a sharp fall in its share price and its trading volume was high during the material period. The company should have disclosed the triggering of GN3 without delay to facilitate informed investment decisions by its shareholders.”

Based on Bursa’s guidelines, SCAN Associates triggered two of the three criteria that would have prompted the classification. First, it incurred a loss of RM7.1 million in its financial year ended Dec 31, 2014, which exceeded its shareholders’ funds of RM6.2 million. The results were released on Feb 27. Second, its aggregate losses for two consecutive financial years exceeded its shareholders’ funds.

“While announcements related to GN3 or PN17 would typically have a negative impact on the price of the securities, this does not justify the company withholding the information from the market, thus allowing it to trade the securities,” says the expert.

Based on the listing requirements, SCAN Associates’ GN3 status was triggered when the full results for FY2014 were announced on Feb 27.

It is worth noting that SCAN Associates changed its financial year-end to June 30, which was announced on April 27. It claims that this did not trigger GN3.

According to the May 10 affidavit filed by the group in its request for an injunction, it had announced the change in its financial year-end on April 27 while Bursa had started ascertaining its financial position on May 5. The manoeuvre — changing the financial year-end — is not addressed in the regulator’s Guidance Note and may be a point of contention if the matter goes to court.

Another crucial factor that determines the basis of the lawsuit is the position of the company’s auditor. In its statement of claims to the High Court, SCAN Associates states that it was notified by the auditor that it did not trigger GN3.

According to the affidavit, however, on May 7 — two months after SCAN Associates’ latest quarterly results — a Bursa officer had contacted the auditor to verify if there were any fraudulent elements in SCAN Associates’ accounts. The next day, a directive was issued to SCAN Associates to announce that it had triggered GN3. While the auditor has yet to disclose its stand, SCAN Associates says it has appointed another auditor to verify its claim that it did not trigger GN3.

Whatever the case, a prolonged legal battle with Bursa could come at the expense of SCAN Associates’ shareholders as the legal costs may exacerbate its already precarious financial position.

While Bursa has been consistent in implementing various classifications in the past, actions such as that by SCAN Associates may indicate the need for more clarity in some of its listing requirements.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on May 25 - 31, 2015.

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