SGX RegCo’s resolution with Stamford Land spotlights rules on allotment of rights shares

SHOULD a public-listed company ever be allowed to allot excess rights shares to its directors or controlling shareholders without first satisfying all applications from minority shareholders?

The listing manual seems clear enough. Rule 877(10) states that directors and substantial shareholders should rank last in the allocation of rights shares.

Singapore Exchange Regulation (SGX RegCo) also recently took Stamford Land to task for violating this rule in a rights issue announced in 2021.

In a joint statement on Dec 15, SGX RegCo and Stamford Land said they had reached a resolution on the matter. Stamford Land and its directors did not admit any liability, but the company’s controlling shareholders will make a donation of S$2 million to the SGX Investor Education Fund.

This is the first time SGX RegCo has settled a violation of its rules in this manner.

However, SGX RegCo seemed to leave the door open for companies to come forward and make their case, if they have concerns about fully satisfying all applications for excess rights shares by minority shareholders.

“A concern arises, for example, where the application for excess rights shares is vastly disproportionate in relation to the number of shares that a minority shareholder holds,” SGX RegCo said in a Regulator’s Column published the same day its settlement with Stamford Land was announced.

“Such individuals may have purchased a small quantity of the issuer’s shares in order to participate in the rights issue, for the purpose of acquiring a large quantity of excess rights shares at discounted prices,” SGX RegCo added.

The regulator went on to say that it should be consulted if companies have legitimate concerns. “The onus is on issuers to justify to SGX RegCo why it should not insist on strict compliance with the rule.”

On what basis would SGX RegCo determine that Rule 877(10) need not be strictly applied, though? Why should a minority shareholder be denied a “vastly disproportionate” allocation of excess rights shares if they have the money?

SGX RegCo told The Business Times earlier this week that fulfilling applications for excess rights shares should not become a mechanism to gain control of a company or a means of circumventing any listing rules.

“The issue of shares resulting in transfer of controlling interest would ordinarily be subject to shareholders’ approval,” said an SGX Group spokesperson.

Stamford Land’s rights issue

On the face of it, there was little risk of this happening in the Stamford Land case.

On Dec 7, 2021, Stamford Land announced a 9-for-10 rights issue of 703.7 million new shares priced at S$0.34 per share.

The rights issue price was 29.2 per cent below Stamford Land’s closing price the previous day, and 50 per cent below its net asset value as at Sep 30, 2021, of S$0.68 per share.

UOB was appointed the lead manager of the rights issue. A group of Stamford Land shareholders that included its executive chairman Ow Chio Kiat agreed to take up their rights entitlements as well as any unsubscribed rights shares.

These so-called “undertaking shareholders” held 361.2 million shares, equivalent to 46.2 per cent of the company’s total shares. They were part of a concert party group that held more than 50 per cent of Stamford Land’s shares.

On Feb 9, 2022, Stamford Land said it had received valid acceptances for only 597.7 million of the 703.7 million rights shares.

The company said the 106.1 million rights shares that had not been validly accepted would be put towards satisfying applications for excess rights shares, while taking Rule 877(10) into consideration.

Applications for a total of 413.1 million excess rights shares had been received.

Based on subsequent filings, some of the unsubscribed rights shares were allocated to directors of Stamford Land.

Notably, executive chairman Ow held a total direct and deemed interest in nearly 329.1 million shares before the rights issue. This would have entitled him to 296.2 million rights shares, and increased his total direct and deemed shareholding to more than 625.2 million shares after the rights issue.

In fact, he was allotted nearly 350.1 million shares. This increased his total direct and deemed interest to more than 679.1 million shares on Feb 16, 2022.

His direct and deemed stake in Stamford Land expanded to 45.7 per cent immediately after the rights issues, from 42.1 per cent just before the rights issue.

Don’t restrict minorities

With the resolution SGX RegCo and Stamford Land announced on Dec 15, we now know that some of the excess rights shares were allotted to directors of Stamford Land without applications from minority shareholders being fully satisfied.

It is also evident that allotting all the available excess rights shares to minority shareholders would not have presented any risk of a change in control of Stamford Land. The 106.1 million unsubscribed rights shares represented only 7.1 per cent of the company’s enlarged share base.

If this was not previously clear to Stamford Land and the lead manager of its rights issue, it is now.

The action taken by SGX RegCo on this matter should be seen as a win for all minority investors in the local market.

Companies that go public should not expect to be able to choose their shareholders. Anybody on the street can decide to own their shares.

There should be rules to maintain a listed company’s public float, and manage the potentially destabilising effects of any change in control.

Beyond that, however, a company’s minority shareholders should not be restricted from opportunistically increasing or decreasing their holdings at any time for their own benefit.