When the JSE can protect you in a delisting and when it can’t

• South Africa
• Business rescue, Delisting, JSE, Listing
• September 20, 2020

Very few people understand what it means to be “listed” on a stock exchange. Perhaps more importantly, even fewer understand what a delisting means, even though this can become the reality for the likes of Comair, which will delist later this year as part of its approved Business Rescue plan.

In this article, my intention is to explain some core company law concepts in a way that didn’t require you to study law. In doing so, I hope you will have a better understanding of what it means to be listed and what a delisting could mean for shareholders.

I hope that you’ll also appreciate the risks of investing in companies that are on the brink of financial ruin.

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Private vs. public companies

The difference between a private and public company is laid down by the Companies Act. It relates to the governing structure of the company (known as the Memorandum of Incorporation or MOI) and the rules regarding the company’s shares.

From a legal perspective, a company is presumed to be a public company unless certain restrictions apply or unless it is a state-owned company. The restrictions can result in the company either being a “personal liability” company (ignore for this purpose) or a private company. A company is a private company if the MOI prohibits the company from offering shares to the public and restricts transferability of shares.

Simply put, in a private company the directors can control who the shareholders are. In a public company, this isn’t the case.

Not all public companies are listed, but private companies are never listed

The fundamental reason to list a company is so the shares can be easily traded among investors on an exchange. Therefore, a private company cannot be listed because the directors of listed companies have no say on who the shareholders are.

Importantly, not all public companies are listed. These companies trade “over-the-counter” (i.e. not on a formal exchange) or simply don’t trade at all because there is no way for buyers and sellers to easily find each other. Remember, even a public company is under no obligation whatsoever to help shareholders trade the shares, but directors may wish to assist because it enhances the value of the company if people can trade its shares. We will deal with this concept further on.

What regulatory regime does a listed company fall under?

A listed company is first and foremost a company, so the Companies Act is the primary piece of legislation that governs what the company does. The JSE Issuer Regulation Department sets the rules for listed companies but cannot decree anything in direct conflict with the Companies Act, because the latter is an Act of Parliament whereas the former is an Act of Normal People Sitting in Sandton.

It is the purpose of the JSE Issuer Regulation Department to create rules that achieve a number of objectives including but not limited to (or inter alia in fancy legal speak):

• Orderly market trading
• Fair treatment of minority shareholders
• Adequate disclosures for investors and stakeholders
• Adherence to defined timetables for corporate actions
• Ongoing compliance by listed companies with the rules

The latest edition of the JSE Listings Requirements is 415 pages long. Experts in this field are called JSE Approved Executives and companies hire them to ensure that compliance with the requirements is achieved.

Many are lawyers by profession, but this certainly isn’t always the case.

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An exchange is like Tinder for companies

Liquidity is the concept of how quickly and easily an asset can be sold without having to drop the price significantly.

A solid real-world example would be the ease of selling a VW Polo vs. a 15 year old Citroen in South Africa – there’s a much larger market for the Polo and you’ll sell it more easily and with more potential buyers which improves your negotiating position and therefore your achievable price. The Polo is more liquid than the Citroen.

A listing improves a company’s liquidity because investors seek out listed companies to invest in. Shareholders can offer their shares for sale through the trading system and can be matched with potential buyers.

It’s a bit like Tinder for company shareholders.

A combination of liquidity as well as public transparency is why listed companies usually trade on much higher multiples than private companies. A listed company can attract a Price / Earnings multiple as high as 30x or more depending on the industry. It’s rare to see private companies going for more than 7x or 8x and most SMEs are lucky to sell at 3x.

Suspended from trading vs. delisting

Tongaat Hulett had an accounting scandal that led the directors of that company to request a trading suspension from the JSE in June 2019. This was to enable management to finish the forensic investigation, allowing investors to trade with proper information rather than based on speculation of what the outcome might be.

The suspension was lifted in January 2020 and trading resumed.

Importantly, a suspension is not the same as a delisting. A suspension is temporary. A delisting is permanent unless the company follows the full process to become listed again.

Why do companies delist and what happens to shareholders?

The reasons for a delisting range from great news (like another company makes an offer to buy all the shares in the listed company from shareholders at a strong premium to market price) to really bad news (the JSE delists the company in the public interest or because the company refuses to comply with listing regulations).

Obviously, a delisting is either hugely profitable for shareholders or financially catastrophic. The JSE won’t act lightly in delisting a company for that exact reason. For example, Steinhoff is still a listed company despite the alleged fraud scandals.

Where a company voluntarily delists for any reason (e.g. cannot justify the costs of being listed due to thin trade in the share), the company must obtain approval from shareholders to delist and must make an offer to the shareholders to buy the shares at a price confirmed by an independent expert as being fair.

This is “taking a company private” and typically requires an investor with deep pockets to lead the transaction, like a private equity company. If the listed company is sitting on loads of cash and happy to self-fund the offer, then that is also possible of course.

In a situation where the JSE forces a delisting, there is no protection for shareholders. The JSE cannot force a company to buy out its shareholders, which is why a forced delisting isn’t treated lightly.

Shareholders will sit with shares that cannot easily be sold and may be essentially worthless. It’s important to remember this when investing in marginal companies or those that are riddled with governance concerns and reputational issues.

Finally, how does it work in a Business Rescue?

Even an endless number of Kulula bookings by Discovery’s Vitality clients over the years couldn’t save Comair from destruction during lockdown. The company was already struggling after SAA paid only a portion of the settlement figure owed to Comair and the disaster of the Boeing MAX didn’t help either. Lockdown was the nail in the aviation coffin.

Listed since 22 July 1998, Comair’s listing was suspended on 5 May 2020. That may have been a temporary step, but the recent approval of the Business Rescue plan is not. It’s worth noting that unions plan to still fight the process in court, but I can’t see the broad principles of the plan changing much, especially the intention to delist.

Unfortunately, the reality of the situation for shareholders is made clear in clause 7.2.10.1 of the Comair Business Rescue Plan:

Basically, shareholders are toast. A new investor will pump R500m into the company at a valuation of practically zero, diluting existing shareholders down to almost nothing. The Business Rescue Practitioners and PwC feel that this is no worse than if the company was liquidated, because there isn’t even enough money to pay creditors anyway.

If you invest in a bankrupt company, the JSE cannot save you. They cannot force a company in Business Rescue to make an offer to shareholders. The Companies Act takes precedence and shareholders usually get nothing.

Keen to read more on Business Rescue? Check out my article that does a deeper dive into the topic. 

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