Published September 23, 2008

Compulsory Catalist delisting: who will protect minority rights?

By R SIVANITHY
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SINCE the introduction this month of transition measures by the Singapore Exchange (SGX) to manage the move by former Sesdaq companies now on Catalist to the sponsor-supervised model - which were seen as aiming to speed up the switching process - the market's focus has been on the expense associated with sponsorship and the tardiness of the more than 100 firms involved.

This is because companies have clearly been slow to embrace the Catalist model, one major reason being the expense involved in having a sponsor to provide supervision.

Firms failing to get their act together and hire a sponsor by the February 2010 deadline face the threat of delisting. It therefore looks like Catalist members and their shareholders are caught between a rock and a hard place: on one side is high cost, and on the other is a possible delisting.

Less appealing listing

Calls have thus been made for the exchange to reconsider its timetable or tweak the model to grant firms more leeway.

What everyone has taken for granted, however, is that remaining listed on Catalist is something desirable. What if it isn't that appealing to some firms?

The average market capitalisation of a Catalist company as at last Friday was only $38.5 million, with the smallest being $2.7 million.

The entire board trades for less than 60 cents per share, while half or 71 counters out of 144 sell for under 10 cents.

Since many firms are not that profitable - or downright loss-making - what is there to stop underperforming companies, whose shares have languished for years in the lower reaches of penny territory and suffer from poor liquidity, from sitting on their hands until the deadline in 17 months' time, then when faced with SGX's threat of delisting, throwing their hands up in the air and replying 'Okay, go ahead - do your worst'?

More importantly, what might the compensation be for minority shareholders if this is the eventual outcome?

SGX's Catalist Listing Manual states under Rule 13 that if the exchange exercises its power to remove a firm from its Official List, 'a reasonable exit alternative, which should normally be in cash, should be offered'.

This may be via a voluntary liquidation of assets, and an independent financial adviser must be appointed.

In other words, a forcible delisting must be conducted in the same way as a voluntary privatisation.

The problem, however, is that in a voluntary delisting, shareholders have two options: accept the offer or reject it, the latter resulting in the company continuing as a listed entity.

In a forcible delisting, however, there is only one option: accept the offer, because the authorities are cancelling the listing status.

Might it not be difficult then to ascertain whether the offer is reasonable or not? Would minority shareholders then feel unfairly pressurised to accept a possibly unreasonable offer because of the absence of a viable alternative?

There is therefore a need to address the following issues before problems arise in a little over a year's time: would it be incumbent on the independent financial adviser to protect minority rights, or will SGX ensure the exit offer is 'reasonable' since it is the exchange which is imposing the delisting?

This does not mean the Catalist model is flawed or needs to be abandoned.

Financial Darwinism

Countries all over the world have accepted that market-based regulation via sponsors is most appropriate for small, untested companies and many have already adopted the sponsor-based structure.

It's financial Darwinism or survival of the fittest - firms with poor fundamentals that cannot find a sponsor might be better off relinquishing their listing status.

Seen in this light, the shift to Catalist actually represents the logical next step in the market's evolution since it will weed out the unfit.

But by the same token there is a need to figure out who will look after minority rights and how exactly these rights are to be protected in the event that companies - possibly intentionally - fail to hire a sponsor and thus have to be compulsorily taken private.