ES­CAPE CLAUSE COR­PO­RATE SHENANI­GANS LEAVE SHARE­HOLD­ERS IN THE LURCH

Finweek English Edition - - Coverstory - By Marc Hasen­fuss

There are fates worse than death on the JSE. It’s one thing to suf­fer the in­dig­nity of see­ing a share­hold­ing re­duced to crumbs if a listed com­pany folds in hard times but it’s quite an­other to be left twist­ing in the wind as a trou­bled com­pany shuts off com­mu­ni­ca­tion with share­hold­ers, leav­ing no clues or mech­a­nisms to de­ter­mine the sta­tus of an in­vest­ment. While it’s quite nor­mal on any bourse for listed com­pa­nies to hit the wall or run into se­ri­ous fi­nan­cial trou­bles, it’s wor­ry­ing when trou­bled JSE-listed com­pa­nies ap­pear to have an es­cape clause when it comes to fac­ing up to their re­spon­si­bil­i­ties to­wards their share­hold­ers.

SA Share­hold­ers’ As­so­ci­a­tion chair­man David Sylvester stresses the is­sue isn’t about the fail­ure of any given com­pany. “One ac­cepts that in the nor­mal course of busi­ness some com­pa­nies – whether listed or un­listed – won’t make it.”

He says the most im­por­tant is­sue is how that in­for­ma­tion is com­mu­ni­cated to the mar­ket and share­hold­ers. “It’s very frus­trat­ing for in­vestors to know the com­pany has been sus­pended or had its list­ing ter­mi­nated without hav­ing a rea­son­ably detailed ex­pla­na­tion of how and why the com­pany failed. It’s re­ally a case of bring­ing clo­sure to the is­sue and once that’s es­tab­lished, the in­vestor can make use of the tax ben­e­fit gained through loss on cap­i­tal.”

The ploy, in many in­stances, seems sim­ply to let the list­ing lapse, first by sus­pen­sion from the JSE and then later ter­mi­na­tion.

While most com­pa­nies would avoid a sus­pen­sion like the plague

the de­vel­op­ment some­times ap­pears to be a bless­ing in dis­guise. Once a com­pany’s shares are sus­pended – mean­ing no for­mal mar­ket trad­ing – there may well be a temp­ta­tion for trou­bled com­pa­nies to shut off com­mu­ni­ca­tions rather than face share­hold­ers’ wrath over the ten­u­ous state of its fi­nan­cial af­fairs.

The trig­ger for sus­pen­sion by the JSE is of­ten a com­pany not meet­ing one of the most im­por­tant list­ing re­quire­ments – the pub­lish­ing of fi­nan­cial state­ments within four months from ei­ther the close of the in­terim pe­riod or fi­nan­cial year-end. In many in­stances it would ap­pear once a com­pany’s shares are sus­pended, the ex­ec­u­tives of that com­pany feel there’s no onus on the board to keep share­hold­ers fully up­dated with de­vel­op­ments – op­er­a­tional or oth­er­wise – at the com­pany.

Be­cause share­hold­ers are al­ready de­spon­dent about prospects for their trou­bled in­vest­ment there’s prob­a­bly not too much in­cen­tive to go chas­ing down direc­tors in a bid to es­tab­lish the op­er­a­tional or value sta­tus of the com­pany.

Fin­week be­lieves that if there are reg­u­lar in­ci­dences of com­pany direc­tors not bring­ing clo­sure to share­hold­ers, a ter­ri­ble prece­dent in terms of direc­tors’ re­spon­si­bil­i­ties to­wards share­hold­ers could be set. A prece­dent that will cost or­di­nary share­hold­ers – who are so of­ten tempted to in­vest in higher risk small com­pa­nies – not only their cap­i­tal but ul­ti­mately also their faith in the JSE.

Cer­tainly some direc­tors have ap­peared to be­have in the most mer­ce­nary of fash­ions. Bring a small (per­haps even a start-up) com­pany to mar­ket and use the list­ing process to raise cash based on prom­ises of above-av­er­age re­turns from en­larged or ex­panded op­er­a­tions. Per­haps for one or two years op­er­a­tional set­backs or strate­gic blun­ders can be tol­er­ated by the mar­ket, maybe be­cause – at that point – the com­pany still ap­pears to be a go­ing con­cern. But then things take a turn for the worse and direc­tors know the com­pany’s po­si­tion is no longer ten­able – or vi­able.

The de­fault op­tion then seems to be to de­lay the pub­li­ca­tion of fi­nan­cial state­ments for as long as pos­si­ble, per­haps even throw­ing in an ex­cuse about au­di­tors chang­ing or op­er­a­tional re­struc­tur­ing to lend some cre­dence to the de­lay.

Roughly four months from the hal­fyear end or fi­nan­cial year-end the JSE will sus­pend the com­pany for fail­ing to ad­here to its list­ing re­quire­ments. Of­fi­cially listed com­pa­nies are ex­pected to re­port in­terim and year-end re­sults three months af­ter the close of the re­spec­tive fi­nan­cial pe­ri­ods.

In many in­stances the JSE’s action will spur the com­pany direc­tors into action and re­sults will be pub­lished as a mat­ter of ur­gency in or­der to re­store its list­ing. But sadly some com­pany direc­tors clearly use the sus­pen­sion as an “out” in terms of their re­spon­si­bil­ity to share­hold­ers.

In re­cent years more than a hand­ful of com­pa­nies have seen their list­ings ter­mi­nated without proper cor­po­rate clo­sure. Those in­clude Aludie, Bryant Tech­nolo­gies, Es­sen­tial Bev­er­ages, Rentsure, Shaw­cell, Tigon, To­laram 2000, Tridelta Mag­net, Union Mines, Road­corp, Plas­group, Noble Min­er­als, Planit Tech­nolo­gies, Igam­ing, Jem Tech­nol­ogy, Car­bon Cen­tury Min­ing, Sem­pres, Terexko, Moulded Med­i­cal Sup­plies, APS Tech­nolo­gies, Exxoteq, Rare Earth Ex­trac­tion and Global Vil­lage Hold­ings.

Al­though we ex­am­ine some of those com­pa­nies in more de­tail in a sep­a­rate re­port, share­hold­ers in those com­pa­nies weren’t given clear in­di­ca­tions whether the com­pa­nies could still be con­sid­ered “op­er­a­tional”, con­tained mean­ing­ful as­set value or whether new cor­po­rate al­ter­na­tives were un­der con­sid­er­a­tion.

While it’s patently clear some of those com­pa­nies have sim­ply gone un­der, share­hold­ers can – in two or three com­pa­nies – still see op­er­at­ing as­sets owned by the com­pa­nies still ply­ing their re­spec­tive busi­nesses.

Fin­week doesn’t in­tend to lay blame for the predica­ment at the door of the JSE. In other ju­ris­dic­tions, bourse action against er­rant com­pa­nies is some­times swift and fi­nal (try and find Rand­gold’s secondary list­ing on Nas­daq).

The JSE, to its credit, does of­fer some lee­way for com­pa­nies to re­store value to share­hold­ers while re­main­ing a listed counter. While the JSE may be crit­i­cised for “let­ting the crap on the boards” its more mea­sured ap­proach has of­ten (see sep­a­rate re­port “Some dogs do bark again”) re­sulted in share­hold­ers re­coup­ing some of their in­vest­ment val­ues via res­cue deals.

In terms of curb­ing the in­ci­dences of share­holder aban­don­ment seem­ingly the JSE can only do so much. If direc­tors are de­ter­mined to go to ground there’s not a hel­luva lot its of­fi­cials can do.

JSE Is­suer Ser­vices GM An­dré Visser says the first point to note is all listed com­pa­nies are gov­erned by SA’s Com­pa­nies Act – which in­cludes sec­tions spec­i­fy­ing the fidu­ciary re­spon­si­bil­ity of direc­tors to the com­pany and its share­hold­ers, whether the com­pany is listed or not.

But listed com­pa­nies have ad­di­tional obli­ga­tions in terms of the JSE’s list­ing re­quire­ments. Visser says even on sus­pen­sion or ter­mi­na­tion of a list­ing, the com­pany and its direc­tors re­main gov­erned by the Com­pa­nies Act.

“In terms of the JSE’s list­ing re­quire­ments, listed com­pa­nies have an obli­ga­tion to com­mu­ni­cate with the mar­ket, whether listed or sus­pended.” More specif­i­cally, Visser points out, the list­ing re­quire­ments oblige com­pa­nies with sus­pended list­ings to re­port to the JSE monthly and to share­hold­ers quar­terly.

“How­ever, we ac­knowl­edge that in those cases where the com­pany is liq­ui­dated – and a liq­uida­tor is ap­pointed for that – this re­quire­ment can be­come dif­fi­cult to en­force.” He says once a list­ing is ter­mi­nated, the JSE no longer has ju­ris­dic­tion over the com­pany.

The sanc­tions avail­able to the JSE if a com­pany or its direc­tors fail to com­ply with list­ing re­quire­ments in­clude the ca­pac­ity to fine direc­tors.

Visser says the JSE ap­proaches each case of a com­pany not com­ply­ing with list­ing re­quire­ments on its own mer­its. “We’re sen­si­tive to the pos­si­bil­ity of com­pany direc­tors be­hav­ing in such a way as to prompt a sus­pen­sion and where we sus­pect that, our ac­tions are aimed at pre­vent­ing such be­hav­iour.”

Visser says it’s gen­er­ally not in a com­pany’s best in­ter­est to be sus­pended by the JSE. “Sus­pen­sions have a cer­tain con­no­ta­tion at­tached to them and cus­tomers and sup­pli­ers of com­pa­nies are re­luc­tant to con­duct busi­ness with them un­der those cir­cum­stances.”

Fin­week, which reg­u­larly fields calls from share­hold­ers un­cer­tain of the sta­tus of a sus­pended or ter­mi­nated list­ing, con­curs that a sus­pen­sion car­ries with it a neg­a­tive con­no­ta­tion. But con­no­ta­tions aren’t go­ing to bother direc­tors who re­ally want a trou­bled com­pany to drift off the mar­ket’s radar. In other words: to go qui­etly away without hav­ing to reckon with share­hold­ers as to what’s tran­spired at the com­pany or whether any as­pects of the busi­ness can be sal­vaged.

Af­ter all, a cleaned up com­pany – no mat­ter if it has no op­er­a­tional as­sets – can still stand as a cash shell, which, in time, could re­alise some value should new as­sets be in­jected into the shell.

Fin­week’s sug­ges­tion is that the JSE adapt its cur­rent list­ing re­quire­ments to en­com­pass a rule that pro­vides for a more di­rect in­ter­ven­tion should a com­pany’s share be sus­pended. We sug­gest that on sus­pen­sion an er­rant com­pany is put on close watch by the JSE, some­thing that per­haps would be best served if it was au­to­mat­i­cally en­ti­tled to ap­point a di­rec­tor to serve on the board in a cu­ra­to­rial ca­pac­ity.

The di­rec­tor would then en­sure the com­pany’s direc­tors ad­hered as best they could to the JSE’s reg­u­la­tions and made ev­ery ef­fort to keep share­hold­ers up­dated on sig­nif­i­cant cor­po­rate de­vel­op­ments. Share­hold­ers would also sleep eas­ier know­ing a JSE rep­re­sen­ta­tive was looking out for their in­ter­ests.

With an in­de­pen­dent di­rec­tor over­see­ing a board’s ac­tions and de­ci­sions (or rather, in­ac­tion or in­de­ci­sion) any ir­re­spon­si­ble or value de­struc­tive be­hav­iour could quickly be staunched, re­ported or acted on by the rel­e­vant au­thor­i­ties.

Share­holder ac­tivist Theo Botha be­lieves cor­po­rate ad­vis­ers also have a role to play and should per­haps act in con­junc­tion with the JSE to en­sure share­hold­ers re­main in the loop at sus­pended com­pa­nies.

Visser says Fin­week’s sug­ges­tion about the ap­point­ment of a JSE mem­ber as a cu­ra­tor or non-ex­ec­u­tive di­rec­tor is great in the­ory. But he stresses the sug­ges­tion would be very dif­fi­cult – if not im­pos­si­ble for the JSE – to en­force based on its ex­ist­ing pow­ers and reg­u­la­tory frame­work. “You’ll also find that po­ten­tial non-ex­ec­u­tive direc­tors will be ex­tremely re­luc­tant to as­so­ciate them­selves with com­pa­nies that are sus­pended, es­pe­cially if they had no past as­so­ci­a­tion with a com­pany.”

Visser adds that af­fected par­ties may ap­proach a court for the ap­point­ment of a ju­di­cial man­ager in sit­u­a­tions where they feel the com­pany is be­ing mis­man­aged. In­deed, share­hold­ers also have the right to

call a meet­ing to de­mand in­for­ma­tion from the com­pany and may even re­move the ex­ist­ing board and ap­point new direc­tors to their sat­is­fac­tion.

Visser says in­vestors con­tinue to have all their rights and en­ti­tle­ments avail­able to them in terms of the Com­pa­nies Act ir­re­spec­tive of whether the com­pany is listed, sus­pended or ter­mi­nated. He’s also at pains to stress the JSE treats all queries and com­plaints from share­hold­ers se­ri­ously. “We’ll al­ways try our best to get a re­sponse from sus­pended com­pa­nies and we may take the ap­pro­pri­ate dis­ci­plinary action against those com­pa­nies and direc­tors who refuse.”

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