Over the recent past, the media had been abuzz with complaints from the investing public about the price at which publicly listed companies (PLCs) that are going private are buying back their shares.
To address shareholder complaints, the Philippine Stock Exchange (PSE) is reportedly proposing an amendment of its delisting rules to require that the applicant PLC submit three names from which the PSE will choose the company that will perform the valuation appraisal for its shares.
The proposal is a step towards the right direction but there are other areas in the present rules that may need to be revisited.
Special board approval
The PSE rules merely require that the delisting be approved by a majority of the company’s incumbent directors.
The PSE may wish to consider a more stringent requirement for board approval. For example, it may require that voluntary delisting and its terms and conditions (e.g. tender offer price) must be specifically approved by at least two-thirds (2/3) of the entire membership of the board, with at least a majority of the independent directors voting to approve them. This is the approach taken by the recently-enacted Revised Corporation Code (RCC) for corporations vested with public interest and PLCs are expressly so classified by the RCC.
The PSE may want to adopt this rule considering the state of things in the Philippines where a majority of the board is usually chosen by the majority or controlling shareholders.
Stockholders’ approval for voluntary delisting is a requirement imposed by several stock exchanges in the Asia Pacific region.
Some exchanges require a supermajority (67% or 75%) stockholders’ approval for voluntary delisting. To enable the stockholders to intelligently decide on the delisting, the Stock Exchange of Thailand (SET) specifically requires that the notice for the stockholders’ meeting contain, among others, the (i) reasons for the delisting, (ii) opinion of the independent directors, and (iii) opinion of the independent financial advisor. At the stockholders’ meeting, the company and the independent financial advisor are required to make a presentation to the shareholders.
In addition, some stock exchanges require that shareholders offering to buy back the shares along with parties acting in concert with them abstain from voting on the voluntary delisting resolution. This is the case for the Australian Stock Exchange (ASX) and Hong Kong Exchange (HKEx), and which the Singapore Exchange (SGX) adopted last June to address minority shareholder complaints.
Tender offer price
Stock exchanges around the region have adopted different formulae to determine the reasonableness and fairness of the tender offer price.
From a minority shareholder perspective, the formula adopted by the Indonesia Stock Exchange (IDX) is interesting. It prescribes that the tender offer price must be the highest of the (1) nominal price, and (2) highest price in the regular market over a two-year period, plus return on investment in the form of interest, calculated at the IPO price multiplied by the three-month average of interest rates given to holders of Bank Indonesia Certificate or the equivalent interest rate of government bonds over a period of time prior to the delisting, or (3) fair value based on the appraisal of an independent party.
The SET prescribes a minimum tender offer price similar to Bursa Malaysia.
A minimum or highest-price formula may be worth considering because the investors in our PLCs lose the tax advantages (capital gains tax and documentary stamp tax exemptions) they enjoy under Philippine law.
If the PSE adopts this price formula, it should prescribe it not only for voluntary delisting but involuntary delisting as well. Otherwise, our PLCs will just commit violations to get involuntarily delisted and thereby circumvent the highest or minimum price formula.
Stock exchanges have taken concrete steps to address delisting or privatization of PLCs. Surely, there are competing interests but the common thread of the reforms is safeguarding the interest of the investing public. After all, if the investing public is better protected, the net result is a vibrant and robust stock market where everybody, including controlling shareholders, will emerge as the winner.
The author, a senior partner of ACCRALAW, is the President of the Shareholders’ Association of the Philippines (SharePHIL).