ESCAPE CLAUSE CORPORATE SHENANIGANS LEAVE SHAREHOLDERS IN THE LURCH
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.”