Cai Jin

Raising the bar for SGX delistings

Current rules may not do enough to protect minority shareholders from being squeezed out


Almost 5,000 investors were apparently caught still holding Aztech Holdings shares when the company was delisted in February.

If you think that was just an oversight by a fairly large number of shareholders, think again. When Aztech launched a selective capital reduction scheme last month to buy back shares from them at the same price as for the earlier delisting exercise - 42 cents a share - enough of them cast dissenting votes to block the offer.

These dissenters were irked that they were being asked to part with their shares at only 40 per cent of Aztech's revalued net asset value (RNAV), even though the independent financial adviser (IFA), Stirling Coleman Capital, had assessed the offer as being "fair and reasonable".

The situation begs various questions: Isn't it absurd that so many people are stuck with shares they cannot monetise easily? And since so many of them still have Aztech shares, doesn't it make sense to keep the company listed? In any case, why didn't they fight harder to oppose the delisting move? That would surely have saved them the heartache they suffer now.

To understand how they ended up in such a predicament, we must take a step back to look at the mechanics behind a delisting exercise.

For a company to be voluntarily delisted, a shareholders' meeting must be held where approval for the move must be received from 75 per cent of the shareholders present and where not more than 10 per cent disagree with the move.


The snag is that this feat is made easier because the listing rules here do not bar directors and major shareholders from voting - and since the major shareholder, usually also the company boss, is the party proposing the delisting move, the odds are stacked heavily against minority shareholders.

Just to give an example: Say, a company has 10,000 shares and a controlling shareholder owns 25 per cent of the shares. That means his 2,500 shares will be voted in favour of the delisting.

If he manages to attract, say, another 1,000 shares to his cause, this means that those opposed to delisting would have to gather at least 389 shares, in order to reach the 10 per cent threshold, to successfully block it.

That works out to only 3.89 per cent of the company's shares, but even getting that number of shares could be a problem.

Dissenting Aztech minority shareholder Gilbert Chew said: "The majority of shareholders are generally passive investors and they mostly leave matters to take their course. Companies are well aware of this, and take full advantage of the minority shareholders' apathy."

On the flip side, there is the question of why the company boss should want to delist the company, considering that he has much to gain from holding the listed shares - such as the option of pledging them to a bank in order to get a loan for his other business ventures or personal pursuits.

In recent years, however, some companies are being taken private at a very low valuation at the bottom of the business cycle, only to be relisted in another jurisdiction at a much higher valuation.

One striking example is Hong Kong furniture maker Man Wah Holdings, which was voluntarily delisted from the Singapore Exchange (SGX) in September 2009, only to be relisted in Hong Kong seven months later.

That would have been fine if minority shareholders had been given a good price in the exit offer made by company chairman and managing director Wong Man Li and his spouse Hui Wai Hing.

But the price they got gave them a mere 9.52 per cent premium over the company's last traded price before the offer was made. That offer valued the company at a mere four times price-to-earnings (PE) - a widely used measure of share price relative to profits.

When Man Wah was relisted in Hong Kong in April 2010, it was priced at a historical PE of 12 times. This valued the company at three times what it was worth when it was delisted here.

In giving the rationale for its delisting here, Man Wah did little to publicise its intention to list in Hong Kong. It flagged only vaguely the possibility of "listing its shares on a recognised stock exchange at an opportune time". Even this likelihood was not prominently highlighted in its circular to shareholders.

No wonder, some minority shareholders feel existing listing rules fail to give them adequate protection if an opportunistic major shareholder wants to delist the company and attempt to squeeze them out of their shares at unattractive prices.

As one reader of The Straits Times, Mr Frederick Ho, observed, such "privatisaton" exercises negate efforts to invest in the local stock market. "Investors are taught about 'book value' but, when privatisations occur, the takeover process does not give a hoot about this metric."

What should be done?

Associate professors Christopher Chen and Wan Wai Yee and Assistant Professor Zhang Wei of Singapore Management University (SMU) noted in a paper that, in Hong Kong, the regulators disallow directors, chief executives, controlling shareholders and their associates from voting on a voluntary delisting move, in order to prevent such squeeze-outs.

They wrote: "This provision requiring independent shareholder approval was introduced after the public outcry surrounding the 1990 delisting of Video Technology (with a view to relisting in another market) at a price that was widely seen as extremely low."

In view of what Hong Kong has done to safeguard the interests of minority shareholders in voluntary delistings, perhaps the bar here has been set too low by giving directors, major shareholders and those associated with them a say in voting on such matters.

It is simply too naive to assume that keeping their companies listed is in these people's best interests - and that they would not exploit the rules to use their block of shares to get a company delisted voluntarily.

Given the disparate manner in which the rest of the shares are typically spread among minority shareholders at smaller listed companies, where there are few institutional investors, stopping these company bosses would be next to impossible.

Worse, rather than working hard to find ways to improve the trading liquidity of their shares and raise the public profile of their companies to make their shares more attractive to investors, some company bosses might be tempted to take the easy way out by listing in another jurisdiction such as Hong Kong, if they believe that they can get a better valuation for their companies there.

The SMU academics also noted that minority shareholders could not rely on IFAs to deter opportunistic bids because of the "inherent subjectivity" of the opinions they offer.

Indeed, the academics observed that there had been instances of IFAs assessing offers as being "fair and reasonable" even when the exit offer in question was at a steep discount of more than 30 per cent to the latest NAV of the takeover target.

Against this backdrop, I would say that the SGX listing manual is due for an overhaul.

Delistings have become a red-button issue among aggrieved minority shareholders. It is one area that urgently needs to be looked into when the rule book is revamped.

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A version of this article appeared in the print edition of The Straits Times on September 11, 2017, with the headline Raising the bar for SGX delistings. Subscribe