Tuesday 24 September 2013

Raise delisting threshold to protect minorities

I often lamented the way companies are delisted in Malaysia. It seems Singapore also has a serious problem in that matter, according to an article, written in the Business Times (Singapore). The difference seems to be that in Malaysia these companies simply relist again, a few years down the road. The article (emphasis mine):

When considering applications by majority shareholders to delist, regulators are almost always faced with the delicate task of balancing the interests of the applicants on one side and minorities on the other.

Applicants would logically only want to take a company at the lowest possible price, and this is always when the market has failed to recognise the company's true worth, in which case the share price is massively depressed. When this happens, the offer is always pitched at a small premium to the market, as this can be construed to be "reasonable".

But minority shareholders are almost always unhappy even with the premium because it is usually too small to be attractive and, in their opinion, does not come close to what they think is the true worth of their shares.

Typically then, the delisting exercise is an unhappy one for minorities, who invariably call (or hope) for someone to intervene to protect their interests.

Typically, no one does.

For various reasons, the authorities are reluctant to play the role of saviour to minorities, preferring instead to rely on:

•The rule of caveat emptor which is, to some extent, defensible since shareholders in such "undervalued" companies should know that a hostile delisting is always possible;

•The advice of the independent financial advisers: Most of the time, as long as the advisers deem the offer reasonable - and they usually do because of the premium - and if conditions set out in the Listing Manual have been met, the end result is that notwithstanding violent objections from minorities, the majority usually triumphs and the delisting proceeds.

This scenario has played out several times in the past, most recently last month, with the application to delist Synear Holdings.

Familiar the situation may be, but it does not make it any less painful for minorities who are forced to surrender their shares at a price they believe is not indicative of the company's value. The unpalatable alternative is that if they do not do so, they would end up holding on to shares indefinitely in a non-listed entity, with little prospect of exiting at a profit.

However, other than extending our sympathies to minorities - and accepting that, in the market as in many other areas of life, majority interests usually rule - can anything be done to afford them greater protection?

The answer is yes.

If the authorities today allow companies to go public by allocating the bulk of their initial public offer (IPO) shares to friendly parties via placements - in which case 75 per cent or more of the shares could be held by friendly parties post-listing - then they should also recognise that those friendly parties might very well one day act in concert to the dismay of minorities.

So unless the rules are changed to force companies to give more shares to the public at the IPO stage and fewer via placement to their cronies, the authorities must make it more difficult for concert parties or major/controlling shareholders to one day take a company private.

After all, the system should not be set up to favour corporates and majorities all the time, should it?

Now, if we accept that it is important to view the issue from the perspective of the entire corporate timeline - that is, from IPO to privatisation or listing to delisting - then the present delisting threshold as per the Listing Manual Section 1307 of the Singapore Exchange (SGX), at 75 per cent of total issued shares held by shareholders present and voting at a general meeting, is arguably too low to fully ensure minority rights are preserved.

What a fair threshold might be can be debated, but 90 per cent is perhaps the best, since this is the level for other types of privatisations such as takeovers or one initiated by the exchange itself when a company's free float drops below 10 per cent.

Whatever the raised limit, the overriding concern should be to ensure that minorities do not always lose out when majority parties decide to take their companies private.

The way to accomplish this is to look at the entire corporate timeline, from listing to delisting, and to ensure fairness at both ends of the scale (as well as in between).


  1. While i am in favour of protecting minorities interest and acknowledge that the current system is flawed - it is just how the world operates. Every remedies that i have heard solve a certain flaw in the system but have the potential to open up other issues. For e.g. increasing threshold to 90% may allow a "selected" group of minorities holding a small block of shares to derail a "good" decent proposal which may have otherwise been a "good" corporate proposal for all. Notice i say "good" because in investment, it is always subjective. What is "good" to one may be very bad to another. We tend to forget that investment opinions are always subjective and that is why it can never be fair and pleasing to all.

    Likewise you mention that "the authorities are reluctant to play the role of saviour to minorities" but consider the alternative - more interference from the authorities or even judge/prosecutor/jury all in one for the regulators. I shudder at that thought. Having authorities stepping in may make sense in a few cases but eventually i believe the system will just be corrupted and abused by whoever is in the position to do so. It will not resolve minorities' woes.

    That is why I am a strong believer of caveat emptor. If you dont understand the game, dont play it. I feel that one of the biggest problems we see in the investment community is not insufficient protection but rather too much protection. i.e. when something goes wrong it is always someone else's fault. When investors are treated with kids' gloves, they sometimes act complacent and start acting like one.

    "The way to accomplish this is to look at the entire corporate timeline, from listing to delisting, and to ensure fairness at both ends of the scale"

    My question to you is who gets to decide on fairness? Whoever decide will only be offering a subjective opinion - i.e. someone will still think it is unfair.

  2. Thanks for your opinion, Shadow, appreciated. I actually agree quite a bit with you, that is, if minority investors were more active, fighting for their rights, if there were more independent journalists, who investigated cases and dared to write about their findings, if there were class action suits, and if there was brisk enforcement, acting without fear nor favour.

    But unfortunately that is not the reality, so I would like some more protection for the little man, although I respect your opinion.

    One small remark, almost the whole article is from the Business Times, only the intro is from me. But I agree with most.