One of the things that could certainly shock a newbie stock investor is the prospect of a stock getting “involuntarily delisted”. Being “delisted” means the stock will no longer be “publicly traded”, that is, it will no longer be tradable on the stock exchange.
If this happens, what should you do?
First things first: no need to panic. It’s not like the delisted company has vanished and there’s no way for you to get your money back.
BUT: You have not lost your money — not yet, that is — but frankly speaking, you must be ready for the possibility that you might incur a monetary loss. Read more below why.
First things first, there are two types of delisting in the Philippine Stock Exchange (PSE): Voluntary and Involuntary Delisting.
Types of Stock Delisting in the PSE
1. Voluntary Delisting
Voluntary Delisting is when a company decides to remove its stock as a traded security on the exchange. They might do so if they feel they won’t be able to comply with listing rules of the exchange or if they believe going private would be a better competitive move.
Melco Resorts and Entertainment Phils. Corporation (MRP)
An example of a company that initiated its own Voluntary Delisting was Melco Resorts and Entertainment Phils. Corporation (MRP) in 2018. Melco Resorts or MRP, the operator of casino and entertainment resort “City of Dreams Manila”, completed a tender offer acquiring 1.4 billion out of the 1.6 billion outstanding common shares. The tender offer price for MRP was P7.25 per share.
According to the company’s press release, they decided to delist to allow its majority shareholder, MCO Philippines Investments Ltd., to “better support and facilitate MRP’s future business plans.” MCO believes believes that MRP’s listed status “has not contributed to its ability to raise funds despite considerable efforts and expenses being incurred to maintain its listed status,” the company added.
Energy Development Corp. (EDC)
Also in 2018, shares of Energy Development Corp. (EDC) were removed from the PSE effective November 29, 2018. During its tender offer, EDC bought back around 2.01 billion common shares at P7.25 each, acquiring 10.72% of the company’s outstanding shares.
After the tender offer, only around 0.16% of common shares remained with the public, thus breaching the 10% minimum public ownership requirement rule of the PSE. According to the company, it decided to to delist to be able to “pursue a corporate strategy that would require greater flexibility to support the company’s long-term growth.”
Splash Corporation (SPH)
Another example of a company that filed for voluntary delisting was Splash Corporation (SPH) back in 2016. The company’s stock, then trading as “SPH” in the PSE, voluntary delisted upon the request of Splash Corp. based on “the low trading volume of SPH shares over the last 24 months, the response of the investing public to the ongoing share buyback program, and the company’s desire to avoid telegraphing its business plans to its competitors.”
Other companies that previously sought voluntary delisting include Alaska Milk Corp. (AMC), Eton Properties (ETON), and San Miguel Properties (SMP) which all found it difficult to comply with the PSE’s 10% minimum public ownership rule, thus, the decision to delist.
2. Involuntary Delisting
The second, and more shocking type, is Involuntary Delisting, which from the name itself suggests that the removal was not intended by the company and most likely came about as a result of the penalty imposed on it by the exchange.
Alphaland Corp. (ALPHA)
An example of a company that was penalized with involuntary delisting was Alphaland Corp. (ALPHA) in 2014 over “repeated violations of disclosure rules” following allegations of simulated share sale between Ashmore Investment Management Limited / Alphaland Holdings (Singapore) and Credit Suisse (Singapore).
The PSE ordered the delisting of Alphaland because the company allegedly failed to consistently submit “full, fair, accurate, and timely disclosure of material information.” A tender offer was made to minority shareholders and the stock was tendered back to the company at P9.03 per share.
Calata Corp. (CAL)
More recently, the PSE has initiated involuntary delisting procedures against Calata Corp. (CAL) after CAL’s owner and CEO was found to have repeatedly violated “multiple disclosure requirements” and the “blackout rule” that bans directors and principal officers, who possess certain material information about their companies, from trading their shares within a prescribed period.
Specifically, Calata Corp. was found to have committed 29 violations of the PSE Disclosure Rules requiring publicly listed firms to disclose changes in the shareholdings of its directors and principal officers in a timely manner. The PSE alleged that owner Joseph Calata traded CAL shares multiple times but the company did not disclose such transactions within the required five trading days.
In addition, the PSE alleged that Calata committed 26 violations of the “blackout rule” banning directors and principal officers of a company from trading shares during a period when they were exclusively in possession of material non-public information.
Companies slapped with an involuntary delisting penalty are not allowed by the PSE to re-list within the next five (5) years. In addition, directors and officers of said company would be disqualified from becoming directors or officers of any other company applying for listing within the same period.
Should I sell my stocks if there is a Tender Offer?
Companies whose stocks will be delisted are required by law to make a Tender Offer to minority shareholders to acquire back the shares. The Tender Offer is an offer and invitation by the company to buy back shares at a fixed, predetermined selling price. This fixed acquisition price is called the Tender Offer Price or Tender Price.
Regardless if the company is to undergo voluntary or involuntary delisting, the PSE requires the company to make the tender offer. This move is supposedly intended to protect the interest of minority shareholders. During the tender offer, the company will invite stockholders to tender and sell their shares at the given offer price and predetermined period.
What should you do if the company makes a Tender Offer? Well, you may choose one of three things below.
Option #1: Accept the Tender Offer
This is a good option when the offer price is higher than the current trading price of the stock. Accepting the offer is also a better option if the company is scheduled to be permanently delisted from the PSE, which means the stock will no longer be traded in the exchange.
Option #2: Sell the stocks in the open market
Instead of selling the stocks back to the company, the investor may alternatively choose to just unload and sell the stocks in the open market, that is, through the PSE. This is a viable strategy if the stock price in the market is higher than the offer price of the company.
If the offer price and current market price is way below your acquisition cost, you may choose to hold on to the stocks. This means, however, that upon delisting, the stock will no longer be tradeable in the PSE.
What happens if I decline the Tender Offer?
If you decided to not accept the company’s tender offer, this means you will hold on to the shares even though they will no longer be traded in the PSE.
You will need to convert the scripless / electronic shares into stock certificates (paper form) which can be done via your broker by filling out and submitting request forms, payment of fees, and in some cases personal appearance at the company’s stock transfer office. This process is called “uplifting” of shares, which is simply the conversion of electronic shares into a stock certificate.
Upon upliftment of stocks you own, the shares will no longer be reflected in your online trading account. Your proof of ownership are the stock certificates you hold so make sure you don’t lose them. Since these shares can no longer be traded in the PSE, sale of stock certificates will be done through the stock transfer office of the company instead of the stock exchange.
What happens when a stock gets delisted?
The good news is that investors who own shares of the delisted company do not lose their rights as stockholders of the company. Even if the stock is no longer traded in the PSE, investors still get to receive dividends (if and when they are distributed), participate in stockholder meetings, and retain their vote in corporate matters up for approval.
The bad news, however, is that:
1. It’s now more difficult to find buyers of the shares because the stock is not widely available as before since it’s no longer traded in the PSE;
2. In the absence of liquidity and open market pricing, the stock price could fall since prices will be set through direct negotiations only between buyers and sellers; and
3. Higher capital gains tax are paid on gains from the sale. Delisted or privately-held stocks are charged a capital gains tax rate of 15% under TRAIN law.
What are options for investors of a delisted stock?
Unfortunately, shareholders looking to sell their shares have very limited options once the stock has been fully delisted from the exchange. Here are two (2) remaining options:
Option #1: Find a direct buyer of the stocks
Investors can scout for potential buyers who might be interested to acquire shares of the delisted company. This could prove to be difficult, though, since the stock is no longer made available for sale in the PSE.
Still some investors who would want to bet on the company (with a likely belief that the share price would appreciate once the company is re-listed) might show interest to acquire the shares at a negotiated price. Take note that as per the approved TRAIN law, the capital gains tax on sale of stocks not traded in the PSE is 15%.
Stockholders who can’t find direct buyers of the shares will simply have to hold on to the shares.
As mentioned earlier, they still get to retain their rights as stockholders, and the only definite disadvantage is the lack of liquidity due to the absence of open market trading of those shares. Investors can still earn from the dividends, if distributed, and can choose to sell those shares in the future if there is a willing buyer.
Alternatively, investors can wait for the stock to be listed on the exchange again and possibly benefit from the exponential increase in price. But that could happen many years later — or perhaps, not at all.
So if you’re a stockholder of a company planning on delisting its shares, decide which of the options above would be good for you. Otherwise, if you chose the wrong move, you might end up being a stuck-holder. Pun intended :)