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Minority shareholders upset that companies seem to get away without making one
By FELDA CHAY
04 July 2011
Minority shareholders of companies asked by the Singapore Exchange (SGX) to delist often find themselves in a bind, when the company and its major shareholders appear to be dispensed from meeting a rule requiring that an exit offer be made.
While the listing manual states that an exit offer must be put on the table when a firm is to be delisted, companies have been allowed to leave the bourse even when they do not make any offer.
Many of these cases stem from an inability to make an offer because these firms are cash-strapped or debt-ridden, but at least one company has been accused by its minority shareholders of failing to make an exit offer despite being capable of making one.
What’s adding to the problem is the apparent confusion over whether an exit offer is mandatory when the delisting is ordered by the exchange.
David Gerald, president of investor lobby group Securities Investors’ Association (Singapore), or SIAS, said this is how he understands it: ‘Currently under the SGX Listing Rules, companies are not required to make an exit offer if it is a mandatory delisting. This is because companies may not have the funds. However, if it is a voluntary delisting, then companies must make an exit offer as required by SGX.’
However, Mak Yuen Teen, an associate professor at the National University of Singapore who champions corporate governance issues, believes this is not the case.
‘I’ll be very surprised if SGX says that it does not require firms which are directed to delist to make an exit offer.’
‘In their own regulatory column, they said that firms which are directed to delist do not need shareholders’ approval (for obvious reasons as that may make it impossible for SGX to force the firms to delist), but it is pretty clear to me that firms are required to comply with other parts of the rule.’
The regulatory column Prof Mak referred to states: ‘Shareholders’ approval is not required for exit offers made under directed delistings. However, such exit offers are required to meet the same standards as voluntary delistings including providing a reasonable cash alternative.’
With a rising number of firms being struck off the list without providing minority shareholders an exit offer, some minority shareholders say that SGX needs to clarify whether or not an exit offer has to be made for a mandatory delisting. And that if an offer has to be made, SGX should ensure that companies do not try to get away from making one.
Said a minority shareholder of a delisted firm that did not provide an offer: ‘I found out later that if the delisting is voluntary, then a reasonable exit offer is mandatory. However, if the delisting is mandatory, then it seems the exit offer is not mandatory!
‘This is how SGX appears internally to view the issue of delisting and exit offers. If so, at least they should have informed investors as I based my buying...on the assumption that there will be a reasonable exit offer in all cases.’
When contacted by BT on the matter, SGX simply reiterated the rules in its listing manual stating that a reasonable exit alternative should be provided, and that an independent financial adviser should normally be appointed to advise on the exit offer - suggesting that an exit offer is mandatory for all delistings, including involuntary delistings.
But its silence on how some companies have delisted without making an exit offer is deafening.
Prof Mak said that SGX needs to ensure that the interests of minority shareholders are protected in light of the rising number of firms mandated to delist, but do not provide a payout.
‘I feel that SGX has a moral responsibility to ensure that the company does everything possible to protect the interests of shareholders, including minority shareholders, as it has taken away the right of shareholders to approve a delisting.’
Yap Wai Ming, a partner at Stamford Law, said that part of the problem stems from the lack of incentives for such firms to follow listing rules, given that they are being forced to delist involuntarily.
‘SGX has all these powers under the listing manual. It’s whether they choose to execute, but this is a Catch-22 situation. SGX is the one asking them to delist, they don’t want to delist. In such situations, the incentive (for the firm) to make an offer is very low.’
One way out for minority shareholders who wish to cut ties with a previously listed company is to offer to sell their stakeholdings to the majority shareholder, he said.
However, ‘this is a very unsatisfactory arrangement and it is very difficult for minority shareholders’.
Minority shareholders of a number of delisted firms are now facing this ‘unsatisfactory arrangement’. Last Thursday, Japan Land was struck off the mainboard without an exit offer to shareholders. Reports quoted a source saying that the debt-ridden company’s major shareholder Aizawa Securities declined to provide an exit offer ‘as it is not in their interest’.
There is also the case of General Magnetics, where an exit offer was not made before the company was mandated by SGX to delist in April last year. While a private offer has been placed on the table by the firm’s general manager in recent months, many minority shareholders felt that the price was too low, and are upset that SGX did not push the firm to provide minority stakeholders with an exit offer before delisting.
While Gen Mag was making losses for many years, its balance sheet had stayed relatively clean. The group’s 2009 annual report showed that it had no debt, and held cash and cash equivalents of $6.6 million three months before it was removed from the mainboard.
It also owns a property at Toa Payoh - the General Magnetics Building - which was valued at $15 million by an independent professional valuer, Asian Appraisal Company, in early 2009. To shareholders, the firm had the ability to make an exit offer, but didn’t, and the SGX did nothing.
Other firms that delisted without providing an exit offer include Rotol Singapore, FM Holdings and China Printing & Dyeing.
Valerie Ong, partner and head of the corporate finance practice at Rodyk & Davidson LLP, said that ‘unhappy investors may lobby for changes to our securities laws, to introduce stiff consequences for controlling shareholders who fail to make a reasonable exit offer’.
‘It will be a win for investor protection. But it may make our bourse a less attractive listing destination,’ she said, noting that bourses like the Australian Securities Exchange and the Hong Kong Stock Exchange do not have specific rules requiring exit offers to be made in every delisting situation.