Flurry of corporate activity puts SGX to the test
In a market plagued by poor volume and low volatility, credit has to go to the local corporate sector for keeping interest in equities alive with regular announcements of takeovers, rights issues, joint ventures, asset consolidations, signing of memorandums of understanding and placements. Such deals have often had a positive impact on sentiment and with trading conditions as weak as they are, anything that helps keep interest in local stocks alive is to be welcomed.
Comments
R Sivanithy
18 July 2014
In a market plagued by poor volume and low volatility, credit has to go to the local corporate sector for keeping interest in equities alive with regular announcements of takeovers, rights issues, joint ventures, asset consolidations, signing of memorandums of understanding and placements. Such deals have often had a positive impact on sentiment and with trading conditions as weak as they are, anything that helps keep interest in local stocks alive is to be welcomed.
However, increased corporate activity adds to the challenges that the regulators face in treading a fine line between protecting investors’ interests and not stifling those of companies.
Consider, for example, the case of a potential takeover. There have been instances of companies announcing that heightened interest in their shares is probably because talks are underway that could lead to a takeover. The announcements invariably include a qualifier that because of the need for confidentiality, no names can be mentioned, no prices can be quoted and no guarantees can be given.
In the dark
Not surprisingly, the market is also advised to exercise caution when trading in the company’s shares because nothing may materialise from the talks.
This sort of announcements places the Singapore Exchange (SGX) and investors in a difficult position. Assuming the talks are bona fide to begin with and there really is a potential deal on the table, there is a school of thought which not unreasonably believes that it is pointless to warn the market to trade with care because it is impossible to carefully buy or sell without concrete, meaningful information, and that the only parties who can indulge in any form of informed trading are those privy to the negotiations.
If so, then the objection is that allowing trading to continue when negotiations are ongoing only benefits insiders, while the majority is left to trade in the dark. Moreover, the longer the talks take, the longer the uncertainty and scope for speculation, misinformation and frustration to grow.
In order to ensure a level playing field, the obvious answer would be to halt or suspend trading until the talks are over and a detailed announcement has been made.
The counter to this, of course, is to ask whether it is in the market’s interests to interrupt trading with a halt or suspension, given that the caveat emptor maxim applies and once everyone has been warned to be careful, trading should be allowed to continue. So what should prevail - an arrangement that likely benefits insiders but allows for uninterrupted trading, or one that interferes with trading but takes the advantage away from insiders?
Another contentious area exposed by recent corporate activity is rights issues. There are some who believe that such exercises when offered at deep discounts to prevailing market prices benefit only controlling or substantial shareholders as they allow the latter to raise their stakes cheaply while the resulting dilution is detrimental to the interests of minorities.
If so, should SGX intervene, say for example, by turning down a rights issue that seeks to raise money for a non-specific reason like “working capital” if it thinks there is possibly a disadvantage to minorities if the proposal was to be approved?
Going even further, what if those minorities have subscribed to a rights issue because they were told when the rights were announced that the major shareholder has given an “irrevocable” undertaking to take up its entire portion, only to find later that the shareholder took up only a small portion because of an escape clause buried in the rights document? This clause allowed it to scale back its subscription so as to excuse it from having to make a general takeover offer if it ended up holding more than 30 per cent of the enlarged capital.
In other words if “irrevocable” isn’t really what it implies, what recourse is there for minorities who might feel cheated if they subscribed only because they were swayed by the “promise” that the major shareholder was to invest say, $10 million, but ended up investing only, say $1 million?
Or should these matters be left to shareholders to deal with, since the mandate to call for a rights issue up to a certain level would already have been given by shareholders themselves to the company’s management at an earlier annual general meeting?
The difficulty when it comes to rights and even placements is that if SGX does intervene, it could be accused of effectively evaluating the merits of the fund-raising exercise, a judgemental role that it abandoned more than 15 years ago when it shifted from a merit-based regime to one that is disclosure-based.
It’s a tough call to be sure, balancing the need to preserve minority rights while allowing corporates leeway to conduct their businesses, and you’d expect the issues to take on greater significance in the months ahead as the corporate sector ratchets up its deal-making in a market desperate for such announcements to keep interest alive.