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SGX mulls new rule to protect minority shareholders in delistings

Business Times
12 Jun 2018
Angela Tan

SGX RegCo says recent privatisations have raised 2 issues - whether controlling shareholders should vote, and whether exit offers are too low

Singapore Exchange Regulation (SGX RegCo) is mulling changes to its listing rules, which - if they come to pass - could curtail the role of controlling shareholders in a voluntary delisting, when the odds are often stacked heavily against minority shareholders.

In response to queries from The Business Times (BT), Tan Boon Gin, SGX RegCo's chief executive officer, said recent privatisations of listed companies have raised two issues:

"The first is the question of whether controlling shareholders should be allowed to vote on the matter. The second is the perception that some companies are being taken private at too-low prices," he said.

SGX RegCo has been monitoring these developments and will weigh these against feedback from the market. "Should any rule change be proposed, we will first need to do a formal public consultation and obtain regulatory approval," he said.

Delistings have received a lot of bad press, especially since - more often than not - the offer price has hurt the interests of minority shareholders.

Controlling shareholders of listed companies beset by low valuations have been tempted to take their business private. A lack of liquidity, injection of private equity funding, a desire to retain family control in a private setup and other strategic impetuses have also driven decisions to take a company private.

However, current legislation does not provide effective tools to protect the interests of minority shareholders. For a company to be voluntarily delisted, an extraordinary shareholders' meeting must be held. Approval for the move must be received from 75 per cent of the shareholders present; no more than 10 per cent can disagree with the move.

At such a meeting, the controlling shareholder or shareholders make an exit offer. That they are allowed to vote in a voluntary delisting has been one of the main criticisms of the existing rules.

If a controlling shareholder has 90 per cent of the shares by way of acceptances of the exit offer, it can go ahead with the delisting. In such a scenario, the exit offer becomes unconditional. Its term is extended to allow those parties that did not tender initially to still tender their shares and exit.

Masya Spek, a consultant analyst at Apollo Investment Management, said: "The key difference is that in Hong Kong, the controlling shareholders and their respective associates have to abstain from voting on the proposed delisting."

Rules aside, market observers said, a fair offer has to be made. A delisting should not be used as a threat to put pressure on or force minority shareholders to accept an offer that is at a deep discount to the underlying asset value of the company concerned.

The April 30 extraordinary general meeting (EGM) of Vard Holdings, the target of Italy's Fincantieri Oil & Gas, was a case in point. At that meeting, 96.54 per cent voted in favour of the delisting, and 3.46 per cent against.

Ms Spek said: "What this fails to note is that one controlling shareholder voted in favour, and that everyone else voted against. The 982.67 million 'Yes' votes equated to Fincantieri's shareholding.

"The 35.19 million 'No' votes cast in that EGM represented 100 per cent of the minorities who managed to vote, and 18 per cent of the remaining free float. If this were a Hong Kong company, it would have remained listed." The Vard case was a forced and unfair delisting, not a voluntary one, she added.

"Serial impoverishment of patient long-term investors is not good for markets, for price discovery, or for the efficiency of capital allocation in an economy.

"Singapore regulators must upgrade the rules. A 'squeeze-out delisting' should not be a phrase that your investors need to know or risk."

Under Singapore's current rules, even if the independent shareholders who vote are unanimous in rejecting the delisting proposal, it may pass anyway, unless the voting turnout is unusually high.

Not voting does not mean the shareholders do not care, Ms Spek said.

"Reasons for not voting include custodian paperwork delays, postal delays, holidays, hospitalisation, probate, dauntingly thick and confusing documents... The rules may have been devised for an earlier era of mostly-local shareholders holding shares in their own names, with efficient postal services, and usually at home.

"In current conditions, achieving a high turnout with two weeks' notice may be challenging."

But not everyone agrees that minority interests are inadequately protected, or that controlling shareholders should abstain from voting during a delisting.

Stefanie Yuen Thio, joint managing partner at TSMP Law Corp, said: "The protection is already built in - in that there can't be more than 10 per cent voting against the delisting."

She said delisting is an issue all shareholders have an interest in, even if their interests are not totally aligned.

"To effectively give minorities the right to veto swings the pendulum of rights too far to the populists' end and could be a form of oppression by the minority.

"It would also potentially make SGX a less attractive venue for companies to list, which would be counter productive to an active and liquid market."

Source: Business Times © Singapore Press Holdings Ltd. Permission required for reproduction.