By Ildiko Gyarmati
In recent times, the trend to list businesses on the stock exchanges to secure finance for expansion of the businesses has seen a reversal.
Numerous news reports have highlighted the significant extent of delistings from the Johannesburg Stock Exchange (JSE), and it is estimated that “…at least 32 companies will delist from South African stock exchanges this year”. Many of these delistings are of large, well-known companies, for example: PSG, CSG Holdings, and Adapt IT, to name a few.
While many people think that this trend is cause for concern – a suggestion perhaps of a failing economy or a business in decline – there are many considerations to take into account before reaching such a conclusion.
In fact, despite the increase in delistings, analysts believe that the market capitalisation of the JSE remains stable, with three of the nine major JSE sectors recording positive month-on-month returns, as reported by Quantec.
Therefore, the market in itself is not necessarily in a crisis.
Let’s consider why some companies have considered delisting – this may help us understand the causes of the trend.
For one, a delisting will occur when a listed company is taken over by a new controlling shareholder.
The controlling shareholder may not want to be listed and so the original listed company will delist.
Similarly, when a controlling shareholder company is itself listed, the original listed company may not need to be listed since it will now be able to access capital from the controlling shareholder company, rather than from the public (i.e. via the stock exchange).
Another factor may be the costs associated with a listing.
The JSE is highly regulated and so compliance with the regulations is a necessary element of being listed on the Exchange, and this compliance comes at significant cost.
The regulatory requirements also may result in bureaucratic processes that could limit a dynamic company’s ability to act swiftly when corporate opportunities arise.
In addition, one cannot ignore the economic realities we face today; growth prospects for many businesses have slowed because of dire economic conditions post-pandemic and because of the Russia-Ukraine conflict.
Owing to the substantial number of companies that have delisted or are in the process of doing so, the JSE has taken some measures geared to ensure that shareholders are not negatively affected by such moves.
The Exchange has proposed, for instance, that more than 75% of all shareholders should vote in favour of a delisting before it takes effect – up from the current 50% requirement.
The goal of this is to ensure that shareholders are comfortable with the fact that their shares will no longer be tradeable on the Exchange and thus will no longer be an asset offering high liquidity. (This applies only to voluntary delistings – not where a delisting arises because of a corporate action.)
Another measure that the JSE has taken – in response to criticism about over-regulation – is to relook and change some of the provisions of the Listing Requirements.
These amendments are already in effect, and are explained in the JSE’s consultation paper, “Cutting the Red Tape Aimed at Effective and Appropriate Regulation”.
Another concern resulting from the delistings relates to how companies will be able to source capital needed for expansion projects, since a delisted company can no longer tap into public funds.
In fact, an unlisted company has other options with regards to funding. The funding requirements of a public unlisted or private company are regulated by the provisions of its memorandum of incorporation together with any applicable shareholder agreement. Furthermore, there are no minimum capital requirements for a private company in South Africa, except for those in particular regulated industries such as asset management businesses or financial managers.
Typically, companies are funded by way of their own cash resources or assets. Companies may also appeal to the shareholders to provide funding through either further equity or the provision of loans to the company (at a specific agreed-upon interest rate). The memorandum of incorporation of a private company may also permit third-party funding such as borrowing money from banks.
In addition to these usual funding options, private equity funding also provides for an alternative form of funding that is not within the public markets. Private equity funds may be invested directly into companies or assets.
It is thus clear that we cannot conclude that every instance of a delisting from the JSE is an indication of a problem in the country or of a failing business. When a company has chosen to delist, the shareholders who voted in favour of that decision would have had the opportunity to understand the issues and thus be comfortable with restricting their ability to sell their shares. Further, a view would have been taken about the company’s ability to fund itself or any other strategic benefit of operating in a private/unlisted space.
Ildiko Gyarmati is a senior associate from international corporate law firm CMS South Africa.