Why do companies delist and what is behind this trend?
In the last few years, there has been an emerging trend in South Africa where a number of listed companies have voluntarily delisted from the Johannesburg Stock Exchange (JSE). There are a number of factors which may have led these companies to make this decision, which have been stated in their delisting announcements and which have been discussed in the media by analysts. These factors include, amongst others:
- The main benefit of being listed on a stock exchange is the ability to raise funding from the public. For small and medium companies (in terms of market capitalisation), raising funding may be difficult and expensive.
- The JSE is highly regulated and being listed adds an additional layer of compliance with securities laws (notably the Financial Markets Act 19 of 2012 and the JSE Listings Requirements) which could be expensive and burdensome. Listed companies face intense public scrutiny and risk censure from the JSE, share price crashes and litigation should there be any instances of non-compliance.
- Shareholder approval is required for many transactions and there are restrictions on dealing which may prove prohibitive to the founding or controlling shareholders’ strategy in some contexts.
- Smaller and medium cap securities tend to be undervalued and discounted, although the underlying business may have real value and potential.
- Large institutional investors such as pension funds are primarily interested in investing in large corporations and may overlook small and medium cap companies, whose securities tend to have lower liquidity, making investment unattractive and realisation difficult.
- There is also a rise in investment in indexed exchange-traded funds (ETFs), and these indexes focus primarily on large cap companies.
- In the South African market, it may be easier to achieve and maintain Broad-Based Black Economic Empowerment ownership objectives (e.g. 51% ownership) in the unlisted environment.
Is this a good time to delist?
In the light of the economic recession, price volatility and poor prospects of growth in the South African equity market - compounded by the extreme pressure that the COVID-19 pandemic and extended lockdown is placing on most businesses, companies in certain sectors and especially small and medium cap companies will be feeling a cash flow crunch and may have seen a big drop in their share prices.
While this may cause despair, for some companies it may present a prime opportunity to effect a change in strategy going forward. The founders and controlling shareholders of certain companies which are currently undervalued may find that this is the perfect time to delist. The founders and controlling shareholders will be able to take advantage of the current market conditions and low share prices to make an attractive offer to minority shareholders.
Once delisted, the company will save major costs as a result of operating in an unlisted environment and may be able to increase efficiency, have the ability to create a different capital structure, create more flexibility to restructure and have the ability to pursue the sale or acquisition of assets more easily. For entities that have struggled to raise capital on an exchange, it may make sense to look to alternative funding opportunities such as private equity or venture capital investors.
What is the process for delisting from the JSE?
A delisting of shares from the JSE is regulated by the JSE Listings Requirements.
In order to delist at the request of the issuer company, the issuer company will need to take the following steps:
- The issuer company must make written application to the JSE requesting removal of its securities from the exchange and setting out the reasons for delisting. The JSE may grant this request once the below requirements are met.
A circular must be sent to all shareholders, which will need to comply with all the usual requirements for circulars, and include the following:
the reasons for removal;
the offer to be made to all shareholders and the terms and conditions of the offer;
a fairness opinion from an independent expert;
a statement by the board of directors of the issuer company that the offer is fair to the shareholders and that the board has been so advised by an independent expert; and
the circular must request approval from the shareholders at a general meeting for the approval of the removal of the listing, prior to issuer making the written application to the JSE
The delisting must be approved by at least 50% of the shareholders present or represented at the general meeting, excluding any controlling shareholder, its associates and any party acting in concert or any other party which the JSE deems appropriate.
The delisting will also require exchange control approval from the Financial Surveillance Department of the South African Reserve Bank.
Notwithstanding the above, the JSE Listings Requirements do provide for an exception to the above. Shareholder approval for the removal of a listing need not be sought, and a circular need not be sent to the shareholders, where the listing of such shares is intended to be removed following:
a takeover offer, where the shares have become subject to section 124 of the Companies Act 71 of 2008 (Companies Act) (ie the “squeeze out” provisions in the circumstances where the offer has been accepted by 90% of the shareholders) and notice has been given by the offeror of its intention to cancel the listing of the shares in the initial offer document or in any subsequent circular sent to shareholders; or
the completion of a scheme of arrangement with shareholders in terms of sections 114 and 115 of the Companies Act, as a result of which either all the shares have been acquired or the JSE is satisfied that the issuer company no longer qualifies for listing (the JSE must be consulted for a ruling in this regard).
In most instances, in the case of a voluntary delisting of a small or medium cap company, the controlling shareholder(s) who wish to stay in the company post delisting will make an offer to all the remaining shareholders. It is also possible for a third party to make the offer or to provide the funding. As stated above, the offer needs to be fair to the shareholders, and attractive enough to be approved by the majority, and thus it is usually made at a premium to the current share price.
Should a company wish to pursue a delisting, it will need to decide whether it is comfortable to delist irrespective of whether the offer is accepted by some, most or all of the minority shareholders. In the case of a delisting pursuant to a voluntary offer, a number of minority shareholders may not accept the offer and will therefore remain shareholders in an unlisted environment. Even if such shareholders retain only a very modest percentage of a company’s shares, this could still limit the company’s ability to sanction corporate actions speedily, albeit possibly less so than in a listed environment. For this reason, in practice, where companies are able to obtain sufficient support from shareholders who are not excluded from voting, such companies will often effect a delisting by way of a scheme of arrangement in terms of sections 114 and 115 of the Companies Act, as the acquisition of shares pursuant to a scheme of arrangement (which will require the support of at least 75% of all shareholders eligible to vote) is binding on all shareholders. Usually, a scheme of arrangement is proposed concurrently with a separate general offer on the basis that the general offer will be conditional on the scheme of arrangement being unsuccessful.
Once delisted, a company should have more flexibility to implement its new strategy to unlock value for its shareholders.