GCL-Poly: Non-compliance of the Listing Rules and Lack of Internal Control

Name: GCL-Poly: Non-compliance of the Listing Rules and Lack of Internal Control (English version)
SKU: ST117

DeKrey, Steven John; Liu, Ramee

Product #:ST117

Supplier:Hong Kong University of Science and Technology

Discipline:General Management

Setting:China;Hong Kong

Details:Case (PDF) • 19 pages • 2022-08-09

Subjects:

Corporate governance Business management Leadership and managing people Management

Geography:

China Asia

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$12.40

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In 2021, when GCL-Poly Energy Holdings Limited was the second largest global polysilicon manufacturer. It made and sold polysilicon in mainland China used in the production of solar energy equipment. In September 2019, GCL-Poly's wholly-owned and major subsidiary, Jiangsu Zhongneng Polysilicon was engaged in an engineering, procurement and construction contract (EPC Contract) valued at CNY1.9bn (USD0.3bn). The EPC Contract involved a granular silicon project and engaged a state-owned enterprise (SOE) lead contractor and a subcontractor. But the majority of the holding company's directors claimed they were unaware of this EPC Contract and the contract sum, and they did not announce it to the public and the Stock Exchange of Hong Kong (SEHK). The company's former auditors, Deloitte, raised concerns on the commercial rationale of the EPC Contract, including the validity of the prepayment of CNY510m (USD79.8m) made to the lead contractor. Due to outstanding audit issues and resignation of Deloitte, the company did not release its annual results for year-end 31 December 2020 by the 31 March 2021 deadline. On 1 April 2021, the company's shares were suspended from trading. After the company terminated the EPC contract, on 26 April 2021, the company received a refund from the lead contractor at CNY495.28m (USD77.5m) for the prepayment. The EPC Contract and the prepayment were approved by Jiang Wenwu, the former ED of GCL-Poly's holding company and GM of Jiangsu Zhongneng. According to Jiangsu Zhongneng's relevant internal policy, Jiang also breached the company's internal policy. At the end of October 2021, the SEHK accepted GCL-Poly forensic accountant's report, internal control recommendation, and the new auditor's financial results. The company's shares resumed trading and SEHK and other regulatory bodies did not take disciplinary action towards the company. Do you think the regulators had sufficiently scrutinized this EPC Contract transaction and the company for breaching the Listing Rules? Does this case set a precedent whereby the Directors being "unaware of" a major transaction was a good enough excuse to breach the Listing Rules?

Learning Objectives

1. Examine the internal control and transactions of a listed company and determine if the board of directors have sufficiently exercised their duties. 2. Distinguish the strategies and solutions used to improve cross-border management, corporate governance, and the possibility of preventing fraud by management. 3. Learn about a listed company's "notifiable transactions" and what are the disciplinary actions faced after breaching the Listing Rules. 4. Explore the methods to improve internal control of a company, such as engaging an internal control consultant or a forensic accountant and implementing staff training.