Many small companies are looking at leaving the stock market and short changing their shareholders.
There are many microcap companies out there at the moment whose valuations look far too…. well… "micro".
These offer a lot of excitement for the private investor and theoretically have very little in the way of downside dangers due to their proliferation of cash and other assets, and the fact that they're profitable.
So there we are. No real downside risk, massive upside potential on the basis that these small companies really can gallop away, and, ergo …, no reason for the private investors not to steam in with all s/he can comfortably afford, right? Wrong! And the reason? Well there are a few reasons to be honest, but the main one for many of us at the moment is the ever-growing spectre of de-listing.
Good for them…
De-listings are becoming increasingly popular as majority shareholders in small companies grow frustrated with the valuations and constraints the market places on their companies -- and decide the cost of staying listed outweighs any potential benefit. All too often shares lack liquidity, and it's quite common for small companies to have a market cap lower than their balance sheet value.
In these cases, what's a company to do? It's paralysed by capital constraints to some extent, but is paying somewhere around £250,000 a year in advisers' fees for the privilege of being listed.
Bad news for us…
Touchstone's (LSE: TSE) proposal to de-list ironically came with a generally good trading update this week. It's just the latest in a long line of disappointments for the private investor. During 2008, 88 UK companies de-listed with the vast majority coming from AIM. This was more than double the number of the previous year. Similarly, just 34 companies joined AIM during 2008, raising £537m, compared to 77 companies raising over £2.1bn in 2007. But this year, a staggering 99 companies had quit the market by the end of April compared to just 59 in the first four months of 2008.
Touchstone assured us that "shareholders may be better served if the Group cancelled its AIM quotation". Yeah right! This may be true for majority shareholders, but as for the rest of us… Investors certainly walked with their feet. Why else would the company have seen more than a third wiped off its valuation? The action has understandably upset many Motley Fool investors.
And they aren't all microcaps by any means. GSH Group (LSE: GSH), announced its intention to de-list causing some very understandable concerns amongst Fool discussion board posters. But then the company has a majority shareholder who owns over 80% of the shares -- and it only takes 75% of the shareholders to agree to a de-listing. Something of a fait accompli then!?
A vicious circle
All this is creating a vicious circle. Company directors are disappointed by the market, and so are tempted to de-list. But the potential for de-listing simultaneously deters smaller scale private investors who fear the possibility and stay away -- in droves!
Theoretically, de-listing shouldn't be a huge problem, particularly if your investment decision was a wise one in the first place. Shares are still out on the open market and are often traded on a match bargain basis by a broker. But the reality for investors with, let's say, a couple of thousand quid's worth, is that you'll be sitting on them for many years hoping that maybe something happens one day.
From the companies' point of view, though, the fees associated by de-listing can be paid back in the first year in the lack of advisers' fees. Little wonder it's so fashionable. And the lack of disclosure requirements for a private company is also a big pull. But as private investors, we feel that promises are being broken almost by the day. It's a difficult situation and it's in a tailspin that will take some stopping as both sides are contributing to it; each for very understandable reasons of their own.
Someone should do something
"Someone should do something" to coin a phrase. But who? And what?
There are various potential solutions. For example, companies could be forced to offer a fairer price for shares when delisting, such as the preceding year's average price, for example. This still wouldn't suit many of us, but would be a lot better than the deal we currently get.
Whatever the specific solution found, the London Stock Exchange should make a rule change to put an end to this downward spiral. The legal duty to treat all shareholders fairly is cold comfort to the small shareholder in reality. At the moment, though, the LSE sees "no reason to overhaul the rules" as the "fundamentals are sound". I would disagree. Company directors probably wouldn't.
In the meantime, private investors should always check out smaller companies' ownership profiles to minimise the de-listing risk.
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