Delisting plans by Golden Energy, Boustead Projects a test of SGX’s rules, stated views

THIS column highlighted three weeks ago questions raised by a shareholder of Golden Energy and Resources (Gear) about the manner in which the company’s appointed independent financial adviser (IFA) had been asked to opine on its proposed break-up and delisting.

Four days later, the Singapore Exchange (SGX) read the riot act to Gear’s board and appointed advisers. In a letter dated Feb 24, SGX reminded the company to ensure its IFA’s opinion states specifically whether the “all cash” consideration of S$0.846 is fair and reasonable.

SGX also instructed Gear to ensure its IFA – a firm called W Capital Markets – takes into account material changes to the traded price of its component assets. This appears to be a reference to the soaring market value of Australia-listed Stanmore Resources, in which Gear holds a 64 per cent stake.

SGX said: “If the IFA had taken into account other factors (such as the market trends for Gear’s coal businesses) in arriving at its recommendation notwithstanding the market valuation of such businesses, the IFA should state and explain why such factors are determinative in its recommendations.”

This seems to hint the IFA should be prepared for further scrutiny if it incorporates Gear’s narrative about the environmental, social and governance (ESG) aspects of the deal in its recommendation.

Under the deal, Gear has proposed a distribution in-specie of its 62.5 per cent stake in Indonesia-listed thermal coal producer Golden Energy Mines (Gems). Gear will then be taken private with an exit offer of S$0.16 per share.

This will see shareholders of Gear receive an effective consideration of S$1.045 per share, based on the market price of Gems shares and relevant exchange rates at the time of the announcement.

The proposed deal allows for shareholders of Gear to receive their entitlement to the Gems shares in the form of a cash payment of 7,664.8 rupiah (approximately S$0.686) per share. This “all cash” consideration will see Gear shareholders receiving a significantly lower total payment of S$0.846 per share.

Gear said the deal will cut its exposure to the energy coal business conducted by Gems, which is currently facing ESG pressures.

Gear had asked its IFA to opine on whether the proposed distribution in-specie of Gems and the subsequent exit offer for Gear at S$0.16 per share – when taken together as a single transaction – are fair and reasonable.

The IFA had also been asked to opine on whether the cash alternative to the proposed distribution in-specie of Gems is fair and reasonable.

A shareholder of Gear subsequently complained that the IFA’s opinion on the exit offer of S$0.16 per share should not be conflated with the proposed distribution in-specie of Gems.

SGX’s reminder to Gear to ensure its IFA specifically states whether the “all cash” consideration of S$0.846 is fair and reasonable would ensure the company meets the requirements of Rule 1309.

This rule states that companies seeking to delist from SGX must make an exit offer in cash, and an IFA must opine that the exit offer is fair and reasonable.

Boustead Projects delisting?

SGX might soon have to make a difficult call on another company flirting with a delisting – Boustead Projects.

Boustead Singapore has proposed a general offer for Boustead Projects at S$0.95 per share (up from the initial offer price of S$0.90 per share). As at Mar 10, Boustead Singapore and its concert parties had already accumulated 86.6 per cent of Boustead Projects shares.

Boustead Singapore said it intends to take Boustead Projects private and seek a delisting, should the option become available.

But Boustead Singapore’s general offer for Boustead Projects does not extend to the 19.28 per cent of Boustead Projects shares held by nominees of Wong Fong Fui, even though the chairman and chief executive of Boustead Singapore is a concert party.

Boustead Singapore has consequently said it will not be able to avail itself of the powers of compulsory acquisition under the Companies Act following the completion of the offer.

So, how could Boustead Singapore take Boustead Projects private?

In a Regulator’s Column on Jul 11, 2019, SGX said it will generally allow a company that is the subject of a general offer to delist if the general offer is fair and reasonable, and the offeror has obtained at least 75 per cent of the shares held by independent shareholders.

SGX emphasised that if these conditions are not met, the company in question will remain listed.

Boustead Projects said on Feb 14 it appointed PrimePartners Corporate Finance as its IFA, and recommendation on the offer will be included in a circular to shareholders in due course.

But what if Boustead Projects loses the minimum required public float before the IFA’s recommendation is published? Worse, what if the IFA decides the offer is not fair and reasonable after the minimum public float is lost?

Going by the Regulator’s Column mentioned above, trading of the stock may be suspended but SGX would expect the company to comply with all listing rules – including the requirement to restore its public float.

This could put SGX, as well as Boustead Projects, in a tricky position. Boustead Singapore has said if Boustead Projects is suspended, it will not take any action to get the suspension lifted.

It is unclear to me what SGX will be able to do in practical terms at that point to compel Boustead Projects to restore its public float. After all, SGX cannot force a company that no longer wants to remain listed to comply with its rules and standards.

Dealing with delistings

The scenario I have described above may never happen, of course.

Boustead Projects’ IFA may well decide that Boustead Singapore’s offer of S$0.95 per share is fair and reasonable. And, an overwhelming proportion of Boustead Project shares held by minority investors may end up being tendered.

Nevertheless, SGX should perhaps devise a strategy to manage companies that attempt to slip away from the public market without properly compensating minority investors.

One element of this strategy could be for SGX to respond proactively when companies test its rules and publicly stated positions on delistings, or make laughably inadequate offers.

SGX’s Feb 24 letter to Gear provides a template of sorts for this. Besides calling for Gear and its IFA to ensure compliance with Rule 1309, the letter alluded to the rising value of the company’s underlying assets and warned the IFA to be cautious when considering extraneous factors.

On Boustead Projects, SGX could begin by asking for clarification from the board of Boustead Singapore about its end game with Boustead Projects. Will the two companies comply with SGX’s position on delistings as outlined in the Regulator’s Column of Jul 11, 2019? How will they rebuild Boustead Project’s investor following if the company ultimately remains listed?

SGX should perhaps also keep records of board members and professional advisers of companies that have not adhered to the best governance standards, including in relation to seeking delistings. This information could be made available to companies seeking to appoint them.

A good way of ensuring that corporate boards and their advisers strive for better outcomes for investors is to make their livelihoods dependent on it.

The writer owns shares in Golden Energy and Resources.