Highnoon Laboratories and the curious (court) case of Related Party Transactions

The recent announcement of an Annual General Meeting has raised more questions than answered them

There are certain announcements and incidents that take place in the corporate landscape that seem innocuous in the beginning. It is only when you start to scratch the surface and get to the nitty gritty of the issue when you realize that things are not as innocent as they seem to be. 

The recent announcement by Highnoon Laboratories is one such example. It was seemingly a simple announcement calling the company’s Annual General Meeting (AGM). The notice also mentioned how Highnoon wants to get their related party transactions approved by the shareholders. 

Sounds pretty simple, right? But behind this seemingly simple notification are six years worth of related party transactions worth billions of rupees that are now the subject of a legal battle in the Lahore High Court, with certain Highnoon shareholders claiming the company’s management transferred value from their company to another one. 

So let’s scratch the surface of this supposedly innocuous announcement that might just have gone entirely unnoticed on the stock exchange.  

Related Party Transactions

In the business realm, companies commonly engage in transactions with one another, such as supplying raw materials for manufacturing or procuring goods and services. When two or more companies share ownership, management, or significant voting power, they are categorized as associated companies, according to the Securities and Exchange Commission of Pakistan (SECP). These interconnected relationships can influence decision-making and require enhanced scrutiny of transactions to prevent any potential conflicts of interest

In simple terms, these are two companies which are owned and controlled by the same people and as these people have a say in the operations of both the companies, these companies are considered to be associated with each other. The decision making at one company can have an impact on the other and they need to be qualified as such.

Suppose there is Company A, serving as a raw material supplier for the paper manufacturing industry, and engages in transactions with Company B, which shares common shareholders or management, these transactions fall under the category of related party transactions. Given the intertwined nature of these dealings, they warrant heightened scrutiny due to the absence of external oversight or formal mechanisms for determining fair pricing. 

This close association between the two entities raises concerns about the potential for one company to exploit the relationship to the detriment of the other, highlighting the importance of ensuring transparency and fairness in such interconnected business interactions.

The situation becomes even more complicated when there is a private limited and public limited company involved. A private limited company has investors and owners who have put up their own money and investment and would look to make sure that they profit from any and all transactions that are being carried out. 

In a public listed company, the owners are not only the individuals who own most of the shares but also investors who have bought shares in the company. If the private limited company is transacting with the listed company, there is potential that the private company will end up selling their raw material at an inflated price which will mean that the listed company will end up paying more. This will reduce the profit earned by the listed company while the private company will end up earning more.

But is it really that simple? Won’t the substantial shareholders at the public listed company also make a loss? Wouldn’t they be disadvantaged as well? Yes, they will be disadvantaged but as they have ownership in the private company as well, they will still end up making a profit from these transactions.

So it is obvious that this can be an avenue where shareholders can lose out. There is a clear conflict of interest and shareholders need to be protected in such a case.

The best course of action would be to disclose these transactions and to inform the market about all the aspects of the trades to let the market decide on the objectivity and accuracy of these transactions. By giving this information to the investors, the company can give a more holistic view of the company to everyone.

So what is done to not allow this to happen? SECP has given out rules and regulations that dictate the area of related party transactions.

Section 208 of the Companies Act 2017

Section 208 of the Companies Act 2017 mandates that a company can only enter into a contract with a related party based on a board-approved policy. The law requires the board to justify such contracts to shareholders and maintain detailed records as per SECP regulations. Approval from the board or members at an AGM must be obtained within ninety days of entering into the contract. 

Failure to secure approval renders the contract voidable, and the director involved must indemnify the company for any losses incurred. This regulatory framework aims to prevent conflicts of interest and ensure transparency in related party transactions, allowing shareholders to address concerns through formal channels if necessary.

So what exactly happened at Highnoon Laboratories?

Highnoon Laboratories

Highnoon Laboratories is a pharmaceutical company which was founded by Ghulam Hussain Khan in 1968 as a partnership. It was incorporated in 1984, was publicly listed in 1985, and had its shares listed on the PSX in 1994. The company is involved in the manufacturing, sale and import of pharmaceutical and related consumer products. The company recently featured in Forbes magazine’s Asia’s Best Under a Billion List for the fourth time. The company also received the Pharma Export Award at the 6th Pharma Export Summit & Awards 2023.

In its latest notice of AGM, the company announced that they were looking to ratify and pass all related party transactions that it had carried out with its associated companies. Considering the hundreds of companies which announce their AGMs and their agenda items show that it is a normal course of action for a company to ratify these transactions. 

“The Company be and is hereby authorized to enter into arrangements or carry out transactions from time to time including, but not limited to, for the purchase and sale of goods and material with different related parties to the extent deemed fit and/or approved by the Board of Directors. The members have noted that for the aforesaid arrangements and transactions there may be interested directors. Notwithstanding the same, the members hereby grant an advance authorization and approval to the Board Audit Committee and the Board of Directors of the Company, including under Section 207 and/or 208 of the Companies Act, 2017 (to the extent applicable) to review and approve all related party transactions as per the quantum approved by the Board of Directors from time to time,” read the resolution. 

So what was out of the ordinary? 

The first sign that something is not normal is the fact that the policy of the company has been to approve these transactions through its board. The annual reports of the company state that the Audit Committee working under the Board of Directors approves any related party transactions based on their set policy and once that is done, the board approves these transactions as well. The company has been pursuing this policy and this meets the requirements of the SECP. Looking at any previous agenda items set for the AGM shows that no approval from shareholders was sought before the one in 2023.

Why this change in policy? Has the company finally started to follow the precedence of the market and start to get all of these transactions approved by the board and the shareholders?

Another fact that is out of the ordinary is that the approval is being taken from the shareholders for not only 2023 but the agenda item also states that any future transactions which will be carried out have been approved already as well. 

As per the resolution,“The related party transactions, for the period ending December 31st, 2024, shall be deemed to have been approved by the members, and shall subsequently be placed before the members in the next Annual General Meeting for ratification and confirmation.” 

Why the urgency to get future transactions approved a year before? Why is the company looking to get transactions that it will carry out with its associates till 31st December 2024 before they have even occurred?

Lastly, in its agenda item, the company is stating all the past transactions that have been carried out from 2018 to 2022 when they are getting the recent ones approved? There is little evidence that shows that these transactions were approved in previous AGMs. If the board has already approved them and a minimum obligation to the laws has been met, then why are these transactions being stated again? 

When reached to get a reply on these exact questions, the company secretary at the company failed to reply or provide any justification.

The transactions that have been highlighted by the company pertain to transactions carried out between Highnoon and Route2Health (Private) Limited. From 2017 to 2023, the values presented by the company itself state that they have purchased materials worth Rs 4.1 billion with Route2Health (Pvt) Limited. For the 1st quarter of 2024, no transactions have been carried out but the approval already exists from the shareholders as the special resolution was passed by the shareholders.

So why not file a case against the company and its directors?

Case is filed at Lahore High Court

Well that is exactly what has happened now. Ghulam Hussain Khan, the initial founder of the company, filed a case against Tausif Ahmed Khan, the current chairman of the board. The case alleges that Tausif Ahmed Khan has transferred value from Highnoon to Route2Health which is a company where Tausif Ahmed Khan holds directorship and shares.

Even though this can seem like a victimless crime, the loss of profitability, cash reserves and retained earnings of Highnoon is hurting the shareholders who bought the shares of the company thinking that its owners and directors will work for the betterment of the company. The case alleges that the chairman has gotten his family members elected on the board and is now transferring wealth from Highnoon to his other venture.

A huge point of contention in the case is the fact that the transactions are being approved by the Audit Committee. Two of the members on the Audit Committee in the past were Nael Najam and Zainub Abbas. These individuals were also shareholders at Route2Health while Zainub Abbas was a director at Route2Health simultaneously. Zainub Abbas is still part of the Audit Committee while she has served as a director and a shareholder at Route2Health. Nael Najam was in the board and the Audit Committee till December 2022 after which she resigned. Nael Najam is no longer a board member at Route2Health but still holds shares of the company.

Essentially, the same people were approving the transactions at Highnoon while they were benefiting from these same transactions on the other side. Despite an active conflict of interest, they were able to vote on these issues and get these resolutions passed when they should have recused themselves.

In addition to that, once these transactions were passed, no evidence or documents relating to these related party transactions was given to the directors of the company which shows mala fide on the part of the committee and the remaining board members. For example for 2022, board resolutions were passed in the board meeting held in April of 2022. When minutes were to be confirmed in the next meeting, Hussain Khan raised the issue that he had not been provided the necessary documentation for the approval from the last meeting. These documents were not given. This was a common occurrence at the company where the Company Secretary did not provide the documentation on time to all the directors. The company secretary at Highnoon is also the company secretary at Route2Health (Pvt) Limited.

The petitioner kept raising the fact that transactions were being approved by the board with related parties and no documentation was being provided to all the directors which was against the rules and regulations. From April 2022 to December 2022, the petitioner was stonewalled and not given rationale and reasoning for the transactions being approved. Hussain Khan also raised the issue that Nael Najam, an independent director at the company, was not independent as she was a shareholder at Route2Health and was approving trades with the associate company. Based on this objection, Najam resigned from the board in December 2022. After this, multiple attempts were made to check the share register, record their protest to the affairs at the company and raise concerns to the appropriate authorities but it seems that all pleas fell on deaf ears.

Now a case is proceeding at the Lahore High Court.

Editor’s Note: Initially, Highnoon had not given Profit a response regarding these events. After the publication of this story, the company gave an official clarification and their version of the story. That has been included in a separate section at the end of this article. However, one source close to the company also reached out to Profit to explain that the events mentioned above are “based on the point of view of a shareholder with less than 2% stake in the company. Hence, it is not the impression of the majority of the shareholders.” The source went on to explain that it defies logic to suggest that the company could achieve extraordinary profit growth if there were any substance to these allegations. While the complete response has been included at the end, we are mentioning these points here because they are relevant to the claims being made in the court case filed by Ghulam Hussain Khan.  

Why the change in policy?

While the court deliberates on the case and Highnoon not responding, the recent policy change can be hypothesized. Up until December of 2022, the audit committee was made up of Nael Najam, Zainub Abbas and Ghulam Hussain Khan. Before this, Hussain Khan had raised Hue and Cry over the fact that all related party transactions that would be approved by the Audit Committee and then would be ratified by the Board of Directors. As the board was taking the onus, these were not presented to the shareholders in the AGM.

After Hussain Khan started to question the transactions being approved and started to ask for rationale and justification of these transactions, the company started to stonewall any attempt of becoming transparent. As the objectivity of Nael Najam was also questioned, she had to resign as an independent director. A new director was appointed in the form of Tariq Wajid. Again, the company has classified him as an independent director even though he holds shares in the company. Regardless, the new audit committee is now made up of Zainub Abbas, Ghulam Hussain Khan and Tariq Wajid.

Due to the recent tensions at the company, the audit committee might not act like a rubber stamp for the company. The audit committee would want these transactions to be highlighted and presented to the shareholders for their interest and better understanding. Even though these transactions would be approved by the shareholders, there is still a release of this information into the public which was not carried out before. The recent vote results showed that the measure was approved in a landslide of more than 95%. Still, the fact that these transactions were even put forward by the company shows that a step in the right direction has been taken by the new audit committee and board.

Management’s response

In response to inquiries from Profit, the company has clarified its commitment to strict compliance measures as mandated under the Companies Act, 2017, especially concerning transactions involving related parties. Management explained that these transactions undergo a thorough review process, initially scrutinized by the Audit Committee before being forwarded to the Board of Directors for final approval. The company maintains transparency throughout this process, with detailed minutes that clearly outline the nature of the transactions, ensuring they are conducted as part of normal business operations and on an arm’s length basis.

Further elaborating on its practices, the company disclosed its interests in its associate company, Route 2 Health (Private) Limited, and its wholly owned subsidiary, Curexa Health (Private) Limited. It was emphasized that all transactions with these entities are fully disclosed to Board members and comprehensively reported in the company’s quarterly and annual financial statements for public scrutiny.

To reinforce their transparency, the management also mentioned that these transactions were presented to shareholders at the most recent AGM held on April 29, 2024, confirming adherence to applicable laws. Additionally, in addressing suspicions regarding its profit growth, the company highlighted that its significant growth amidst an industry facing diminishing returns demonstrates the integrity and efficiency of its operations and financial management. This consistent and significant profit growth not only reflects the company’s robust performance but also its unwavering commitment to ethical business practices.

Further, as per the management, all the related party transactions have contributed to increasing the margins/profitability of Highnoon.

The story has been updated to include Highnoon’s response, which was provided subsequent to the initial publication. 


Zain Naeem
Zain Naeem
Zain is a business journalist at Profit, and can be reached at [email protected]


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