EDITORIAL: Rules needed to plug leaky shares gap
At the moment, there is no recourse for ordinary shareholders when a director’s speculative position ends up denting a company's share price
The time has come for the JSE and other regulators to step up and protect shareholders from directors who take speculative positions in their companies’ stock.
Weighed down by SA’s economic woes, the JSE’s all-share index has struggled to make headway in the past four years. The country’s main bourse has gained just 9% in that time, versus the S&P 500 Index’s 38% rise.
In this low-growth environment, the last thing investors want to see is forced equity sales by a company’s directors, who are supposed to act in the best interests of shareholders. This only adds to value destruction.
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Over the past 16 months, directors of at least three JSE-listed companies — EOH, MTN and Ascendis Health — have had to offload stock in their companies to meet obligations to lenders. In December 2017, two directors at EOH sparked a 35% share price decline in a single day when they had to contend with margin calls.
An investor — in this case, the directors — receives a margin call from a bank or stockbroker if the value of a share bought with borrowed money falls below a certain level. They must then either deposit more funds into the loan account or sell the asset to cover their position.
At the time, Just One Lap founder Simon Brown said this was “an epic disaster — if it was my board I would fire the directors”.
“A share price collapse has real consequences, especially for a company like EOH that uses their shares for acquisitions,” Brown said.
Then, in September 2018, MTN’s sharp valuation decline — triggered by a demand that it return dividends worth $8.1bn to Nigeria — was compounded by forced selling by a director because of a financial instrument he took out with a bank in 2009. The most drawn-out example of this is Ascendis Health, which has had to embarrass its main investor almost every week since November 2018 with its “dealings in securities” announcements.
The forced sales, by private equity company Coast2Coast, were triggered when Ascendis’s shares fell below R5 on concerns about the company’s debt levels and weak organic growth.
Coast2Coast borrowed against the health-care company’s shares to underwrite Ascendis’s R750m rights offer in 2017, when it bought shares at R20 apiece. That move has come back to haunt Coast2Coast, Ascendis, and the group’s investors.
Coast2Coast’s Gary Shayne, who resigned from the Ascendis board at the end of March, has been mum about how many shares remain on the chopping block. The uncertainty caused by the forced sales is a blight on Ascendis’s investment case, even though some analysts say the stock is now cheap at R4.05.
Considering the harm that this has caused investors, it would be prudent for SA’s financial regulators to intervene. At the very least, directors should be required to disclose any loans or derivative positions they have linked to their companies’ shares. At the moment, there is no recourse for ordinary shareholders when a director’s speculative position ends up denting the share price.
The JSE’s only requirement is that when directors sell shares that were pledged as security for loans, the company must disclose these transactions. But in Ascendis’s case, investors are now in the dark because Coast2Coast is no longer represented on the board — meaning its share sales will slip under the radar.
Thankfully, SA’s main bourse is taking some action to protect investors. In September 2018, the JSE released a consultation paper proposing some amendments to its listing requirements. One of the proposals is that directors will have to disclose agreements in which they pledge their companies’ shares as collateral against loans.
The JSE has proposed that this information must be disclosed in the company’s annual report so that investors have a consolidated view of shares pledged by all its directors, says Andre Visser, GM of issuer regulation at the JSE.
“The JSE will publish the proposed amendments to the requirements for public consultation in due course,” he says.
Regulators should consider going a step further by restricting the types of share arrangements directors are permitted to take on.