We all knew it was coming.

In a world where the call for minority shareholder protection is the corporate equivalent of the #MeToo movement, was it any surprise that the Singapore Exchange (SGX) would ring-fence minorities’ risks by changing its rules relating to voluntary delistings?  

To recap, under the new regime (“New Rules”), exit offers have to be both “fair” and “reasonable”, and neither the offeror nor its concert parties may vote on the delisting resolution. A fair price means the offer must at least match the share’s value. Reasonableness encompasses broader considerations such as the offerors’ voting control and the securities’ liquidity.

This dichotomy has led to several delistings at prices that the independent financial advisers (IFA) had opined were not fair but were reasonable, including the now-infamous Vard Holdings case that prompted the changes. Other offers suffering from split personality disorder include those for China Minzhong and CWG International, as well as Keppel Corp’s take-private of Keppel Land.

At a principle level, it makes sense. Investors buying listed shares want an exchange in which to trade. Privatisation is a draconian gesture: sell me your shares or – cue evil laughter – I will remove the market for them. It should be exercised without conflict of interest or self-dealing.

That the New Rules came about due to the shareholder furore over Vard’s “lowball” delisting offer, which many had considered to have taken advantage of a cyclical slump in the shipbuilding industry, shows the regulator’s openness to constructive – and clamorous – feedback. More closely aligning our rules with those of our friendly competitor, Hong Kong, where controlling shareholders may not vote, is another plus. It is so tiresome to be continually compared unfavourably to the Fragrant Harbour, after all. (Although Beijing probably envies our ability to put down the Little India riot in a matter of hours, compared to weeks of unhappy uprising over the SAR’s extradition bill.)  

Commentators have been generally positive about the development, with The Edge Singapore calling the move “commendable”. And while it is good that the SGX is constantly refining the rulebook to stay relevant to shareholder concerns, it is also worth taking a harder look at the roll-out of the New Rules.

Raising the barriers to exit

A key implication of the New Rules is that they do not apply to just the SGX’s voluntary delistings procedure, which allows a company to be delisted if a resolution that satisfies the voting thresholds is passed and the offeror makes a reasonably priced exit offer. But some delistings are achieved via schemes of arrangement and takeover offers. So, as part of its comprehensive overhaul, the SGX will now apply the “fair and reasonable” requirement to these too.

For schemes, this effectively means that the regulator will not approve shareholder circulars for such arrangements unless the price is both fair and reasonable. At first blush, this does not appear to be a deal-breaker – recent schemes have all cleared the hurdle. However, as we enter a shakier economy with more corporate failures being reported, debt restructurings via schemes of arrangement involving the rights of creditors, shareholders and other stakeholders such as perpetual securities holders, will become more common. Such schemes are not principally targeted at delisting and will typically involve protracted financial bartering. Looking out for the interests of only one group – the minority shareholders – by insisting on a minimum exit price may not be equitable to all stakeholders.

The New Rules will also change how companies delist after a takeover offer. Previously, if a takeover resulted in the loss of a 10 per cent public float, the SGX would generally allow a delisting. Now, if the offeror does not gather enough acceptances to trigger a compulsory acquisition under the Companies Act, the SGX is unlikely to agree to the delisting unless the offer terms satisfy the New Rules. In this scenario, the listed company will be suspended, but must continue complying with listing rules and incur the associated costs.

This has two implications. First, offerors will think twice before using a takeover as a delisting device unless they are confident they will be able to exercise the squeeze-out right. Large controlling shareholders are unlikely to choose this path because the squeeze-out imposes a higher bar, requiring acceptances in respect of 90 per cent of the shares not held by them and their related corporations. This is unless they are able to exploit the Companies Act loophole and use a vehicle that, while being owned by them, is not technically a related corporation, as Ron Sim did when he privatised OSIM.

The second implication is this: the minority shareholder who did not accept the offer may well find himself holding shares in a company that continues to be listed on, and subject to the compliance rules of, the SGX, but with no ready market. The SGX is betting on offerors not wanting such a situation and upping their offer terms accordingly.

Excluding concert parties

The New Rules disqualify the offeror’s “concert party group” from voting on the delisting resolution. This term, which takes its definition from the Takeover Code, is extremely wide. It does not just include parties who are actually working together in the delisting; there is an assumption that a plethora of collateral players, from directors of associated companies and their relatives, to the offeror’s professional advisers, are deemed to also be acting in concert unless proven otherwise.

Questions abound. How will a listed company ensure that individuals on the margins of the definition do not vote on the resolution? Is that even its responsibility? If not, what is the point of having a regulation that is so unwieldy and difficult to enforce? And what if a delisting resolution is ostensibly passed but it is later alleged that concert parties had inadvertently voted? That is not a headache I envy the SGX. Surely it would be simpler, and more appropriate, to restrict those parties who are in fact working together with the offeror from voting?

Are the New Rules nice or necessary?

Shareholder protection is a good thing – research shows that it is critical in developing a strong capital market. The New Rules also align us more closely with Hong Kong where premiums for privatisation offers are significantly higher than those here.

But were they necessary? The old listing rules already had safeguards built in. Voluntary delistings would fail if 10 per cent or more of the shareholders vote against the resolution. In the case of schemes, these are already under the jurisdiction of the High Court, a forum where all stakeholders can air their concerns.

A cursory examination of the past two years’ delistings reveals that many have met the “fair and reasonable” test. And even those that didn’t were able to be privatised through a compulsory acquisition, save for Vard. This begs the question: will the changes result in higher exit offers?

What the New Rules do is sound a populist gong. The Vard case generated a lot of media attention, with shareholders’ unhappiness over the low exit price spilling over into complaints about non-material errors in the IFA’s analysis and improper voting procedures. The SGX is signalling that it is open to change. It is to be hoped that the New Rules will also open up the cheque books of offerors to unlock shareholder value, rather than close the door to IPO aspirants wary of an over-regulated bourse.

A version of this article was first published in The Business Times on 22 July 2019.