All about suspended shares
Something that many investors have had to contend with is the horror that is a suspended share. It sits in your portfolio as a constant reminder of one of your poorer investment decisions; you’re unable to sell it and, valued at zero it taunts you every time you view your portfolio.
But why do stocks get suspended, what’s the process and is there any hope for these demons in your portfolio? To answer the last first, sure, a suspended company will often start trading again, though the share price nearly always takes a hammering when the trading starts again and the process is often very drawn-out. Moving on, why do stocks get suspended? There are two ways a stock gets suspended: either by the JSE or by request from management. The recent suspension of SacOil was requested by the company itself after shareholders rejected a proposed conversion of debt to equity, which resulted in half the board quitting. SacOil is busy putting together a new board and says it will be back – but the share price is likely to collapse when it starts trading again. As I write this, the suspension has been in force for just over a week and is likely to be resolved sooner rather than later.
Management will request a suspension when they are in breach of listing requirements (which SacOil was, with no practical board nor audit committee), or if news has leaked (as happened with Absa a few years back when it published its results in the media the day before releasing them).
Bonatla Property Holdings has however been suspended since November 2010 and while there are occasional SENS announcements, it is not likely the suspension will be lifted any time soon, leaving shareholders frustrated and unable to exit their position.
ArcelorMittal was suspended through a management request back in March 2010 when the Sishen Iron Ore deal fell apart. The stock lost some 20% in the days after the suspension was lifted. The JSE suspends a share when a company is in breach of listing requirements such as late results or for being a cash shell. Results are due within three months of the period end and, while the JSE does give some leniency, eventually a company that has not issued results will be suspended. Once the breach of the listing requirements has been resolved the suspension will be lifted, so the issue is how long it takes to resolve the issues. Sometimes it can take ages.
The final way a company can be suspended is if it enters liquidation, like 1time did late last year. In this case the stock remains suspended until the winding up of the business is complete and the shareholders are paid out whatever is left (typically a very small amount), after which the shares are finally deleted. This process takes years and shareholders see very little, if any, return.
So how does one avoid being caught in the suspended share trap?
Sometimes one can’t (the ArcelorMittal suspension certainly came out of left field). But generally suspended shares are smaller stocks that are struggling; results are poor, cash is tight, directors may be leaving – simply put, the ship is f loundering. Investors often invest in these stocks hoping for a massive turnaround in the business but only to see the share shooting the lights out – but as we’ve written before, losers generally remain losers and one is best advised to heed the warnings and get the heck out before the suspension demon arrives.
Simon Brown is a Finweek contributor and heads justonelap.com, a free resource of f inancial information and investment education.