SGX's delisting rule changes are commendable; impact on Challenger, IndoAgri would have varied

On July 11, SGX said that exit offers in conjunction with voluntary delistings must henceforth be both fair and reasonable. It added that it will work with relevant industry bodies to develop guidance and standards for independent financial advisers (IFA) and their opinions. In addition, offerors and their concert parties must now abstain from voting on voluntary delisting resolutions. In order to pass, these resolutions will now require the support of 75% of the shares held by independent shareholders present and voting.

Previously, a voluntary delisting resolution would pass if it obtained the support of 75% of the shares held by all shareholders present and voting, as long as no more than 10% of the shares voted against the resolution. With only independent shareholders now allowed to vote on delistings, the “10% block” no longer applies.

These rule changes come after a consultation process by SGX that ended in December last year. Since then, SGX has conducted further engagement with some of the respondents to better understand the feedback it had received. Although the rule changes it has made relate specifically to voluntary delistings, they are likely to have implications for any corporate exercise that results in a public-listed company in Singapore being taken private. Indeed, SGX warned this past week that offerors should not use other forms of privatisation to avoid complying with the new voluntary delisting rules.

If a general offer is made, SGX will consider waiving the exit offer and the shareholder vote requirements if the general offer price is determined to be fair and reasonable, and the offeror receives acceptances for at least 75% of shares held by independent shareholders. Importantly, if these conditions are not met, the company in question will remain listed, even if the public float of the issuer falls below the minimum threshold, according to SGX. Trading in the company’s shares may be suspended, but the company will be expected to meet its continuing obligations under the listing rules — including restoring its public float.

In effect, this could limit the ability of an offeror with a commanding stake in a company to weaponise the potential loss of the company’s shareholding spread and frighten minority investors into accepting a low-ball offer. However, whether minority investors actually find themselves with more power to demand a better deal in a delisting exercise depends on the specific circumstances of the company.

Analysing the impact

In the case of the recent offer for Indo­Agri, these latest rule changes would have put more power in the hands of minority investors, in my view.

IndoAgri’s parent held 74.53% of the company’s shares when it launched a voluntary cash offer. The offer price was initially 27.75 cents a share (ex-dividend basis), but was later raised to 32.75 cents. By the time the offeror threw in the towel, it had garnered acceptances that would have pushed its stake up to 88.08%. But the offer was conditional on the offeror breaching the 90% mark. So, minority investors who accepted the offer had their shares returned.

If the offeror had breached the 90% mark, the remaining minority investors of IndoAgri would have been under pressure to accept the offer because the company would have lost the minimum necessary shareholding spread to remain listed. Companies on the Mainboard need to have at least 10% of their shares held by 500 public shareholders. IndoAgri had informed its minority shareholders that no effort would be made to maintain the company’s listing status. If acceptances for 90% of the shares held by minority shareholders were obtained, giving the offeror a total stake of 97.45%, the offeror would then have been able to compulsorily acquire the rest of ­IndoAgri’s shares.

Under the new delisting rules, IndoAgri’s minority shareholders would not have been under pressure to accept the offer once the offeror breached the 90% mark, based on what SGX has said. Instead, the offeror would have needed to garner acceptances for at least 75% of the shares held by minority investors, which would have put its total potential stake at 93.63%. Even then, SGX would not have given its approval for the company to delist, because the offer for IndoAgri was not determined to be fair and reasonable. The IFA appointed by the company had said the offer price, even after it was raised, was not fair but reasonable. In short, IndoAgri’s parent would have needed to offer a much higher price to have had any chance of taking the company private.

The impact of the new delisting rules on Challenger would have been quite different. In this instance, the offeror was a special-purpose vehicle that was 70%-owned by Challenger’s CEO Loo Leong Thye and his family and 30%-owned by Dymon Asia Private Equity. The offer price was 56 cents (with dividend). While many investors felt the offer price was too low, the IFA appointed by Challenger declared it to be fair and reasonable.

The Loo family owned 54.58% of Challenger when the offer was unveiled. Their long-time business partner, Ng Leong Hai, who owned a further 24.06%, had provided an undertaking to accept the offer. With a combined stake of 78.64%, the only way the Loo family and Ng could be stopped from pushing through the delisting exercise was for 10% of the shares held by other shareholders to vote against the proposal. As it happened, a group of minority investors led by a boutique fund house called Pangolin Investment Management succeeded in doing exactly that. At an extraordinary general meeting (EGM) last month, 11.36% of Challenger shares voted against the delisting exercise while 88.64% voted for it.

Under the new rules, the offeror and its concert parties would not have been allowed to vote. At the point of the EGM, they owned 55.57% of Challenger. However, Ng would have been allowed to vote his shares at the EGM, as he had no stake in the offeror. To prevent the delisting, at least 25% of the shares that were not held by the offeror and its concert group would have needed to vote against the proposal. That is equivalent to 11.11% of Challenger’s total shares, which is more than the 10% hurdle required under the old delisting rules. The dissident minority shareholders of Challenger would still have won the day, but it would have been a narrower victory.

Wake up the ecosystem

While this latest move by SGX is commendable, there is only so much that can be achieved by tweaking the rule book, in my view. To fully restore the confidence of minority investors in the Singapore stock market, players across the whole ecosystem — from independent directors to sell-side analysts — need to relook the standards to which they adhere and reimagine the role they play.

This column has previously asserted that independent directors ought to be relentless in trying to maximise the value of companies that are the subject of offers and delisting exercises. And, they should not expect to still have their jobs when the dust settles. This column has also pointed out shortcomings in the manner that IFAs weigh the financial terms of some offers. It is heartening to hear that SGX now plans to help develop guidance and standards for the IFAs.

In the end, if a sense of reform is to be fostered in the local market, we need to have a robust conversation about everything that’s not working well and find suitable solutions. On behalf of The Edge Singapore, I can say that we too are eager to be part of that effort, and would encourage anyone with something constructive and insightful to say to get in touch with us.

See also: “SGX's revised delisting rules and their impact on privatisations through general offers”